A simple closed-form approximation for constant elasticity of variance spread options

摘要

By applying the Lie-Trotter operator splitting method and the idea of the WKB method, we have developed a simple, accurate and efficient analytical approximation for pricing the constant elasticity of variance (CEV) spread options. The derived option price formula bears a striking resemblance to Kirk's formula of the Black-Scholes spread options. Illustrative numerical examples show that the proposed approximation is not only extremely fast and robust, but it is also remarkably accurate for typical volatilities and maturities of up to two years.