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No 2015:3 Closed Form Valuation of Three-Asset Spread Options With a view towards Clean Dark Spreads

Author

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  • Green, Rikard

    (Knut Wicksell Centre for Financial Studies, Lund University)

Abstract

We perform a slight generalization of the Bjerksund and Stensland (2011) spread option valuation formula to cover three-asset spread options. We investigate the pricing performance of the model against the corresponding version of the Kirk formula and the true price calculated with Monte Carlo methods. The numerical setting of the evaluation is designed to mimic a real market situation in the German OTC market for clean dark spread options. The results show that both models give similar and accurate price estimates (compared to the true option price). Comparing the performance between the models we conclude that the three-asset Bjerksund-Stensland formula performs marginally better compared to the three-asset Kirk formula (counting the number of test cases with the lowest absolute pricing error against the true option price).

Suggested Citation

  • Green, Rikard, 2015. "No 2015:3 Closed Form Valuation of Three-Asset Spread Options With a view towards Clean Dark Spreads," Knut Wicksell Working Paper Series 2015/3, Lund University, Knut Wicksell Centre for Financial Studies.
    • Handle: RePEc:hhs:luwick:2015_003
    Note: Full text versions of the paper: http://www.lusem.lu.se/media/kwc/working-papers/2015/wp-wp-2015-3.pdf
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    References listed on IDEAS

    as
    1. David C. Shimko, 1994. "Options on futures spreads: Hedging, speculation, and valuation," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 14(2), pages 183-213, April.
    2. Petter Bjerksund & Gunnar Stensland, 2014. "Closed form spread option valuation," Quantitative Finance, Taylor & Francis Journals, vol. 14(10), pages 1785-1794, October.
    3. Minqiang Li & Jieyun Zhou & Shi-Jie Deng, 2010. "Multi-asset spread option pricing and hedging," Quantitative Finance, Taylor & Francis Journals, vol. 10(3), pages 305-324.
    Full references (including those not matched with items on IDEAS)

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    Keywords

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    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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