TITLE:
The Model-Free Equivalence Condition for American Spread Options
AUTHORS:
Sang Baum Kang, Pascal Létourneau
KEYWORDS:
Spread Option, American Option, Early Exercise, Real Option
JOURNAL NAME:
Theoretical Economics Letters,
Vol.7 No.4,
June
13,
2017
ABSTRACT: 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.