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Pricing of Spread Options on a Bivariate Jump Market and Stability to Model Risk

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  • Fred Espen Benth
  • Giulia Di Nunno
  • Asma Khedher
  • Maren Diane Schmeck

Abstract

We study the pricing of spread options and we obtain a Margrabe-type formula for a bivariate jump-diffusion model. Moreover, we study the robustness of the price to model risk, in the sense that we consider two types of bivariate jump-diffusion models: one allowing for infinite activity small jumps and one not. In the second model, an adequate continuous component describes the small variation of prices. We illustrate our computations by several examples.

Suggested Citation

  • Fred Espen Benth & Giulia Di Nunno & Asma Khedher & Maren Diane Schmeck, 2015. "Pricing of Spread Options on a Bivariate Jump Market and Stability to Model Risk," Applied Mathematical Finance, Taylor & Francis Journals, vol. 22(1), pages 28-62, March.
    • Handle: RePEc:taf:apmtfi:v:22:y:2015:i:1:p:28-62
    DOI: 10.1080/1350486X.2014.948708
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    References listed on IDEAS

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    1. Ernst Eberlein & Sebastian Raible, 1999. "Term Structure Models Driven by General Lévy Processes," Mathematical Finance, Wiley Blackwell, vol. 9(1), pages 31-53, January.
    2. Gerald Cheang & Carl Chiarella, 2011. "Exchange Options Under Jump-Diffusion Dynamics," Applied Mathematical Finance, Taylor & Francis Journals, vol. 18(3), pages 245-276.
    3. Fred Espen Benth & Pål Nicolai Henriksen, 2011. "Pricing of basket options using univariate normal inverse gaussian approximations," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 30(3), pages 355-376, April.
    4. Ernst Eberlein & Antonis Papapantoleon & Albert N. Shiryaev, 2008. "Esscher transform and the duality principle for multidimensional semimartingales," Papers 0809.0301, arXiv.org, revised Nov 2009.
    5. Ernst Eberlein & Kathrin Glau & Antonis Papapantoleon, 2010. "Analysis of Fourier Transform Valuation Formulas and Applications," Applied Mathematical Finance, Taylor & Francis Journals, vol. 17(3), pages 211-240.
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    Cited by:

    1. Farshid Mehrdoust & Idin Noorani, 2023. "Valuation of Spark-Spread Option Written on Electricity and Gas Forward Contracts Under Two-Factor Models with Non-Gaussian Lévy Processes," Computational Economics, Springer;Society for Computational Economics, vol. 61(2), pages 807-853, February.

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