An American call on the difference of two assets

Abstract

We consider the finite-lived American call option written on the difference of two assets (the spread). For this problem, no closed form solution to the optimal exercise strategy or to the option value is known. The outline of this paper is to present and evaluate a simple closed form exercise strategy. Extensive numerical investigation indicates that the opportunity loss from following this simple exercise strategy is marginal. Thus, the option value corresponding to the simple strategy represents a very accurate approximation to the true option value.