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Sep 17

Spread option valuation

Posted by abiao at 14:49 | Code » C++ | Comments(0) | Reads(10728)
Spread option derives its value from the difference between the prices of two or more assets, it can be considered as a type of rainbow option in that it's payoff depends on 2 or 3 underlying assets. for instance, for a 2 underlying assets call spread option, the payoff is like max(S1 - S2 - K, 0), where K is the strike price betting on the spread (or difference) of these two stock prices. Spread option is widely used in energy industry, especially in oil industry.

In previous entry how to price spread option with Monte Carlo simulation was introduced, here is another valuation method of spread options follwing the article Low-Fat Spreads by K. Ravindran, RISK, Oct 1993.

for detail check http://www.mathfinance.org/FF/cpplib.php

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