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Control Variates for Monte Carlo-Pricing of Three-Asset Spread Options with Application in the Energy Markets

Dahlblom, Oscar LU (2016) NEKH01 20161
Department of Economics
Abstract
The purpose of this paper is to compare a collection of control variates for Monte Carlo-valuation of spread options on three assets with a view towards energy markets and to lay a foundation for continued research on control variates, e.g. combinations of control variates and adaption for quasi-Monte Carlo. The paper builds upon previous research on option pricing using Monte Carlo-simulation and closed form approximations. The use of underlying assets, underlying spread, call option, exchange options and delta hedge as control variates are tested in both a parametric study to test the impact of every input parameter, and a real-world scenario using data from the Dutch energy markets. In the real-world scenario the exchange option... (More)
The purpose of this paper is to compare a collection of control variates for Monte Carlo-valuation of spread options on three assets with a view towards energy markets and to lay a foundation for continued research on control variates, e.g. combinations of control variates and adaption for quasi-Monte Carlo. The paper builds upon previous research on option pricing using Monte Carlo-simulation and closed form approximations. The use of underlying assets, underlying spread, call option, exchange options and delta hedge as control variates are tested in both a parametric study to test the impact of every input parameter, and a real-world scenario using data from the Dutch energy markets. In the real-world scenario the exchange option outperforms the other control variates in most cases. Uneven results for the exchange option in the parametric study leads to the conclusion that the use of delta hedge as control variate is the best performing based on the test results. (Less)
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author
Dahlblom, Oscar LU
supervisor
organization
course
NEKH01 20161
year
type
M2 - Bachelor Degree
subject
keywords
energy markets, quantitative finance, Monte carlo simulation, control variates, option pricing, spread options, three assets
language
English
id
8872044
date added to LUP
2016-05-11 14:32:33
date last changed
2016-05-11 14:32:33
@misc{8872044,
  abstract     = {The purpose of this paper is to compare a collection of control variates for Monte Carlo-valuation of spread options on three assets with a view towards energy markets and to lay a foundation for continued research on control variates, e.g. combinations of control variates and adaption for quasi-Monte Carlo. The paper builds upon previous research on option pricing using Monte Carlo-simulation and closed form approximations. The use of underlying assets, underlying spread, call option, exchange options and delta hedge as control variates are tested in both a parametric study to test the impact of every input parameter, and a real-world scenario using data from the Dutch energy markets. In the real-world scenario the exchange option outperforms the other control variates in most cases. Uneven results for the exchange option in the parametric study leads to the conclusion that the use of delta hedge as control variate is the best performing based on the test results.},
  author       = {Dahlblom, Oscar},
  keyword      = {energy markets,quantitative finance,Monte carlo simulation,control variates,option pricing,spread options,three assets},
  language     = {eng},
  note         = {Student Paper},
  title        = {Control Variates for Monte Carlo-Pricing of Three-Asset Spread Options with Application in the Energy Markets},
  year         = {2016},
}