Pricing and Hedging Spread Options in a Log-normal Model

  title={Pricing and Hedging Spread Options in a Log-normal Model},
  author={Ren{\'e} Carmona and Valdo Durrleman},
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
13 Citations
9 References
Similar Papers


Publications referenced by this paper.
Showing 1-9 of 9 references

The value of an Asian option

  • L.C.G. Rogers, Z. Shi
  • Journal of Applied Probability,
  • 1995
Highly Influential
3 Excerpts

Volatility and Correlation in the pricing of Equity, FX and Interest-Rate Options

  • R. Rebonato
  • 2001

Spread Options, Exchange Options, and Arithmetic Brownian Motion

  • G. Poitras
  • The Journal of Futures Markets,
  • 1998
1 Excerpt

Co-movement term structure and the valuation of energy spread options

  • A. Mbafeno
  • in: M. Dempster and S. Pliska (eds), Mathematics…
  • 1997
2 Excerpts

Martingale methods in financial modelling, Springer-Verlag, Berlin

  • M. Musiela, M. Rutkowski
  • 1997
1 Excerpt

Correlation in the Energy Markets, in Managing Energy Price Risk. London: Risk Publications and Enron

  • E. Kirk
  • 1995
1 Excerpt

Spread the Load, Risk, London

  • M. Garman
  • 1992
1 Excerpt

Approximate option valuation for arbitrary stochastic processes

  • R. Jarrow, A. Rudd
  • J. Financial Economics,
  • 1982
1 Excerpt

The value of an option to exchange one asset for another

  • W. Margrabe
  • The Journal of Finance,
  • 1978
2 Excerpts

Similar Papers

Loading similar papers…