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Spread Option Pricing in Regime-Switching Jump Diffusion Models

Author

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  • Alessandro Ramponi

    (Department Economics and Finance, University of Roma “Tor Vergata”, 00185 Rome, Italy)

Abstract

In this paper, we consider the problem of pricing a spread option when the underlying assets follow a bivariate regime-switching jump diffusion model. We exploit an approximation technique which is based on the univariate Fourier transform representation of the option price. The method proves to be computationally very effective with respect to benchmark Monte Carlo estimators and permits the use of several kinds of jump models other than the standard Gaussian setting. As a by-product, the exact price of an Exchange Option may be efficiently computed within this framework.

Suggested Citation

  • Alessandro Ramponi, 2022. "Spread Option Pricing in Regime-Switching Jump Diffusion Models," Mathematics, MDPI, vol. 10(9), pages 1-15, May.
    • Handle: RePEc:gam:jmathe:v:10:y:2022:i:9:p:1574-:d:810019
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    References listed on IDEAS

    as
    1. Alessandro Ramponi, 2012. "Fourier Transform Methods For Regime-Switching Jump-Diffusions And The Pricing Of Forward Starting Options," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 15(05), pages 1-26.
    2. Len Patrick Dominic M. Garces & Gerald H. L. Cheang, 2021. "A Numerical Approach to Pricing Exchange Options under Stochastic Volatility and Jump-Diffusion Dynamics," Papers 2106.07362, arXiv.org.
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    Cited by:

    1. David Liu & An Wei, 2022. "Regulated LSTM Artificial Neural Networks for Option Risks," FinTech, MDPI, vol. 1(2), pages 1-11, June.

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