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An efficient unified approach for spread option pricing in a copula market model

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  • Edoardo Berton

    (Universitá Cattolica del Sacro Cuore)

  • Lorenzo Mercuri

    (Universitá degli Studi di Milano)

Abstract

In this study, we propose a new formula for spread option pricing with the dependence of two assets described by a copula function. The proposed method’s advantage lies in its requirement of solely computing one-dimensional integrals. Any univariate stock price process, admitting an affine characteristic function, can be used in our formula to get an efficient numerical pricing procedure for a spread option. In the numerical analysis we present a comparison with the Monte Carlo simulation method to assess the performance of our approach, assuming that the univariate stock price follows three widely applied models: variance gamma, Heston’s stochastic volatility and affine Heston–Nandi GARCH(1,1) models.

Suggested Citation

  • Edoardo Berton & Lorenzo Mercuri, 2024. "An efficient unified approach for spread option pricing in a copula market model," Annals of Operations Research, Springer, vol. 336(1), pages 307-329, May.
    • Handle: RePEc:spr:annopr:v:336:y:2024:i:1:d:10.1007_s10479-023-05549-2
    DOI: 10.1007/s10479-023-05549-2
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