On the Pricing and Sensitivity of Spread Options on Two Correlated Assets

We consider the exact analytical pricing of an European option written on the spread between two correlated underlying assets. General model-independent properties of the option price are observed and an exact analytical expression for the spread option value is derived in the case of two correlated geometric Brownian motions. The exact values are compared with existing approximations and with direct Monte-Carlo simulations. A graphical analysis of parameter sensitivity in both the spread option price and the option deltas is presented