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Closed Form Valuation of Three-Asset Spread Options With a view towards Clean Dark Spreads

Green, Rikard LU (2015) 2015(3).
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... (More)
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). (Less)
Please use this url to cite or link to this publication:
author
organization
publishing date
type
Working Paper
publication status
unpublished
subject
keywords
Spread options, Financial derivatives, Energy markets, Clean dark spreads
volume
2015
issue
3
pages
17 pages
publisher
Knut Wicksell Working Paper
language
English
LU publication?
yes
id
34f11257-45c0-4bb6-9066-1f5d3c2e7190 (old id 7409660)
date added to LUP
2015-06-29 09:07:58
date last changed
2016-04-16 07:48:43
@misc{34f11257-45c0-4bb6-9066-1f5d3c2e7190,
  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).},
  author       = {Green, Rikard},
  keyword      = {Spread options,Financial derivatives,Energy markets,Clean dark spreads},
  language     = {eng},
  note         = {Working Paper},
  number       = {3},
  pages        = {17},
  publisher    = {Knut Wicksell Working Paper},
  title        = {Closed Form Valuation of Three-Asset Spread Options With a view towards Clean Dark Spreads},
  volume       = {2015},
  year         = {2015},
}