Closed-form approximations for spread options in Lévy markets: Closed-form Approximations for Spread Options in Lévy Markets

We provide new closed-form approximations for the pricing of spread options in three specific instances of exponential Levy markets, ie, when log-returns are modeled as Brownian motions (Black-Scholes model), variance gamma processes (VG model), or normal inverse Gaussian processes (NIG model). For the specific case of exchange options (spread options with zero strike), we generalize the well-known Margrabe formula (1978) that is valid in a Black-Scholes model to the VG model under a homogeneity assumption.