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.
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Notes
The generated parameters satisfy the constraints imposed for the existence of a strictly positive weakly stationary process \(h_t\) and the existence of a valid copula function.
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Acknowledgements
Lorenzo Mercuri acknowledges financial support from the Italian Ministry of University and Research (MUR) under the department of excellence 2023–2027 grant agreement “Centre of Excellence in Economics and Data Science” (CEEDS). This work was partly supported by JST CREST Grant Number JPMJCR2115, Japan.
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Berton, E., Mercuri, L. An efficient unified approach for spread option pricing in a copula market model. Ann Oper Res 336, 307–329 (2024). https://doi.org/10.1007/s10479-023-05549-2
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DOI: https://doi.org/10.1007/s10479-023-05549-2