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Medium · options_pricing · Quant Researcher interview question · exchange_option, margrabe, spread_option, options_pricing, relative_value
Margrabe's formula (1978) provides a closed-form solution for the price of an option to exchange one risky asset for another. The model is a notable extension of Black-Scholes that does not require a risk-free rate, as the price is determined by the net volatility between the two assets. Quant desks apply this formula for pricing spread options, relative-value strategies, and certain types of exotic derivatives. Task Implement the function margrabe_exchange_option(S1: float, S2: float, sigma1: