Saturday, December 27, 2014

lognormal - Risk Neutral Evaluation - Exchange/Spread Options


I have two assets, S1 and S2, which follow geometric Brownian motion processes. This implies that both S1 and S2 have a lognormal distribution.


I'm trying to get the exchange option price formula through the risk neutral valuation, or, in other words C(t,S1,S2)=er(Tt)E(max.


How do I calculate the expected value E(\max\{S_1-S_2,0\})??




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