Author(s)

Sang Baum Kang¹, Pascal Létourneau²

¹Stuart School of Business, Illinois Institute of Technology, Chicago, Illinois, USA.
²Department of Finance and Business Law, University of Wisconsin-Whitewater, Wisconsin, USA.

A spread option involves the right to obtain the spread between two asset prices at a predefined strike price. This type of derivative security is frequently used in financial markets and academic finance. Furthermore, analysts use the spread option technique for real option modeling purposes. Some spread options are American-type in the sense that an option holder may exercise her option prior to the expiration. In this paper, we propose an equivalence condition for American spread options under which they are not exercised early, and are therefore equivalent to European options. Our theoretical results, developed within a model-free economic setting, suggest that the equivalence conditions documented by previous papers do not hold in a distribution-free environment. Traders, quantitative modelers, and financial programmers in various derivatives markets and the real option modeling area may use our results.

Spread Option, American Option, Early Exercise, Real Option

Kang, S. and Létourneau, P. (2017) The Model-Free Equivalence Condition for American Spread Options. Theoretical Economics Letters, 7, 757-763. doi: 10.4236/tel.2017.74055.