# Pricing and Hedging Spread Options

@article{Carmona2003PricingAH, title={Pricing and Hedging Spread Options}, author={Ren{\'e} A. Carmona and Valdo Durrleman}, journal={SIAM Rev.}, year={2003}, volume={45}, pages={627-685} }

We survey theoretical and computational problems associated with the pricing and hedging of spread options. These options are ubiquitous in the financial markets, whether they be equity, fixed income, foreign exchange, commodities, or energy markets. As a matter of introduction, we present a general overview of the common features of all spread options by discussing in detail their roles as speculation devices and risk management tools. We describe the mathematical framework used to model them… Expand

#### Figures and Topics from this paper

#### 326 Citations

Asian spread option pricing models and computation

- Economics
- 2010

In the commodity and energy markets, there are two kinds of risk that traders and analysts are concerned a lot about: multiple underlying risk and average price risk. Spread options, swaps and… Expand

Spread Options as Compound Exchange Options with Applications to American Crack Spreads

- 2006

This paper presents a new analytic approximation for pricing and hedging European and American spread options where the spread option price is represented as the price of an exchange option on two… Expand

Asian basket options and implied correlations in oil markets

- Economics
- 2007

We investigate the problem of valuation and hedging of Asian basket options. We extend the GLN (Generalized LogNormal) approach, introduced in Borovkova et al. [3], to Asian basket options and apply… Expand

Analytic Approximations for Spread Options

- Economics
- 2007

This paper expresses the price of a spread option as the sum of the prices of two compound options. One compound option is to exchange vanilla call options on the two underlying assets and the other… Expand

Pricing spread option with liquidity adjustments

- Economics
- 2021

Abstract. We study the pricing and hedging of European spread options on correlated assets when, in contrast to the standard framework and consistent with imperfect liquidity markets, the trading in… Expand

Closed Form Approximations for Spread Options

- Economics
- 2011

Abstract This article expresses the price of a spread option as the sum of the prices of two compound options. One compound option is to exchange vanilla call options on the two underlying assets and… Expand

American Spread Option Pricing with Stochastic Interest Rate

- Economics
- 2016

American Spread Option Pricing with Stochastic Interest Rates An Jiang Department of Mathematics, BYU Doctor of Philosophy In financial markets, spread option is a derivative security with two… Expand

Long term spread option valuation and hedging

- Economics
- 2008

This paper investigates the valuation and hedging of spread options on two commodity prices which in the long run are in dynamic equilibrium (i.e., cointegrated). The spread exhibits properties… Expand

Pricing and hedging of derivatives in contagious markets

- Economics
- 2016

It is well documented that stock markets are contagious. A negative shock to one market increases the probability of adverse shocks to other markets. We model this contagion effect by including… Expand

Gas Swing Options: Introduction and Pricing using Monte Carlo Methods

- Economics
- 2016

Motivated by the changing nature of the natural gas industry in the European Union, driven by the liberalisation process, we focus on the introduction and pricing of gas swing options. These options… Expand

#### References

SHOWING 1-10 OF 93 REFERENCES

Theory of Rational Option Pricing

- Economics
- 2005

The long history of the theory of option pricing began in 1900 when the French mathematician Louis Bachelier deduced an option pricing formula based on the assumption that stock prices follow a… Expand

Dynamic Asset Pricing Theory

- Economics
- 1992

"Dynamic Asset Pricing Theory" is a textbook for doctoral students and researchers on the theory of asset pricing and portfolio selection in multiperiod settings under uncertainty. The asset pricing… Expand

Option valuation with co-integrated asset prices

- Economics
- 2000

This paper investigates theoretical and practical aspects of options that are based upon two or more assets which are co-integrated. For this purpose, a new, discrete-time model of asset prices is… Expand

Options, Futures, and Other Derivatives

- Economics
- 1989

Contents: Introduction. Futures Markets and the Use of Futures for Hedging. Forward and Futures Prices. Interest Rate Futures. Swaps. Options Markets. Properties of Stock Option Prices. Trading… Expand

The stochastic behavior of commodity prices: Implications for valuation and hedging

- Economics
- 1997

In this article we compare three models of the stochastic behavior of commodity prices that take into account mean reversion, in terms of their ability to price existing futures contracts, and their… Expand

Changes of numéraire, changes of probability measure and option pricing

- Mathematics, Economics
- 1995

The use of the risk-neutral probability measure has proved to be very powerful for computing the prices of contingent claims in the context of complete markets, or the prices of redundant securities… Expand

On the Use of Numeraires in Option Pricing

- Economics
- 2001

In this paper we discuss the significant computational simplification that occurs when option pricing is approached through the change of numeraire technique. The original impetus was a recently… Expand

The Value of an Option to Exchange One Asset for Another

- Economics
- 1978

SOME COMMON FINANCIAL ARRANGEMENTS are equivalent to options to exchange one risky asset for another: the investment adviser's performance incentive fee, the general margin account, the exchange… Expand

Fundamentals of Trading Energy Futures & Options

- Economics
- 1999

In today's changing political and economic environment, it is increasingly important that companies learn to properly use the various trading instruments to protect themselves against price… Expand

Valuation of Commodity Futures and Options under Stochastic Convenience Yields, Interest Rates, and Jump Diffusions in the Spot

- Economics
- 1998

This paper investigates the effects of stochastic convenience yields, stochastic interest rates, and jumps in the spot price on the pricing of commodity futures, forwards, and futures options.… Expand