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.
An efficient unified approach for spread option pricing in a copula market model / E. Berton, L. Mercuri. - In: ANNALS OF OPERATIONS RESEARCH. - ISSN 0254-5330. - (2023), pp. 1-23. [Epub ahead of print] [10.1007/s10479-023-05549-2]
An efficient unified approach for spread option pricing in a copula market model
L. Mercuri
2023
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.File | Dimensione | Formato | |
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