The browser you are using is not supported by this website. All versions of Internet Explorer are no longer supported, either by us or Microsoft (read more here: https://www.microsoft.com/en-us/microsoft-365/windows/end-of-ie-support).

Please use a modern browser to fully experience our website, such as the newest versions of Edge, Chrome, Firefox or Safari etc.

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

På svenska

Author

  • Rikard Green

Summary, in English

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).

Publishing year

2015

Language

English

Volume

2015

Issue

3

Document type

Working paper

Publisher

Knut Wicksell Working Paper

Topic

  • Economics and Business

Keywords

  • Spread options
  • Financial derivatives
  • Energy markets
  • Clean dark spreads

Status

Unpublished