Pricing Spread Options using Matched Asymptotic Expansions

Abstract

This document deals with approximating spread options prices using Matched
Asymptotic Expansions techniques on the correlation. More precisely, it deals with spreads options on assets that are highly correlated (ρ ∼ 1), which is most commonly observed in Oil Markets (Crude Oil vs. Gasoline for example). We will first start by applying this methodology to exchange options before generalizing our results to spread options. Then we are going to describe an alternative approach of pricing spread options by approximating the bivariate normal distribution. Finally, we will see how we can apply our methodology to the case where we have more than two assets.