Spread Option Pricing in Regime-Switching Jump Diffusion Models

Alessandro Ramponi
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Alessandro Ramponi: Department Economics and Finance, University of Roma “Tor Vergata”, 00185 Rome, Italy

Mathematics, 2022, vol. 10, issue 9, 1-15

Abstract: In this paper, we consider the problem of pricing a spread option when the underlying assets follow a bivariate regime-switching jump diffusion model. We exploit an approximation technique which is based on the univariate Fourier transform representation of the option price. The method proves to be computationally very effective with respect to benchmark Monte Carlo estimators and permits the use of several kinds of jump models other than the standard Gaussian setting. As a by-product, the exact price of an Exchange Option may be efficiently computed within this framework.

Keywords: spread options; regime-switching jump diffusion; Fourier inversion; Monte Carlo methods; option pricing (search for similar items in EconPapers)
JEL-codes: C (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (1)

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