PRICING OF SPREAD OPTIONS ON A BIVARIATE JUMP MARKET AND STABILITY TO MODEL RISK

Benth, Fred Espen; Di Nunno, Giulia; Khedher, Asma; Schmeck, Maren Diane
Research report
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Year
2012
Permanent link
http://urn.nb.no/URN:NBN:no-30695

CRIStin
914751

Is part of
Preprint series. Pure mathematics
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Abstract
We study the pricing of spread options. We consider a bivariate jump-diffusion model for the price process and we obtain a Margrabe type formula for the evaluation of the spread option. Moreover, we consider models in which we approximate the small jumps of the bivariate jump-di usion by a two-dimensional Brownian motion scaled with the standard deviation of the small jumps. We prove the robustness of the spread option to such model risk. We illustrate our computations by several examples.