Spread options, Farkas's lemma and linear programming

Spread options, Farkas's lemma and linear programming


Options on individual underlyings are very liquid in a variety of markets. In many markets, moreover, options on linear combinations of underlyings are also reasonably liquid. Of primary interest to us are markets with liquid spread options (that is, options on the difference of two underlyings), such as constant maturity swap (CMS) spread options in interest rate markets. Our discussion also naturally extends to other important examples such as foreign exchange markets with cross-rate options

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