Pricing and Hedging Spread Options in a Log-normal Model

@inproceedings{Carmona2003PricingAH,
  title={Pricing and Hedging Spread Options in a Log-normal Model},
  author={Ren{\'e} Carmona and Valdo Durrleman},
  year={2003}
}
This paper deals with the pricing of spread options on the difference between correlated log-normal underlying assets. We introduce a new pricing paradigm based on a set of precise lower bounds. We also derive closed form formulae for the Greeks and other sensitivities of the prices. In doing so we prove that the price of a spread option is a decreasing function of the correlation parameter, and we analyze the notion of implied correlation. We use numerical experiments to provide an extensive… CONTINUE READING
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