Valuation of spread options under correlated skew Brownian motions

Shiyu Song, Xingchun Wang () and Xiaowen Zhang

The European Journal of Finance, 2024, vol. 30, issue 5, 503-523

Abstract: In this paper, we employ correlated skew Brownian motions to describe the dynamics of the two assets underlying the spread option. In the pricing model, the two underlying assets are exposed to exogenous risks captured by the same Brownian motion, and their endogenous risks are also assumed to be correlated with each other. We obtain an approximate pricing formula of spread options and calibrate model parameters to real data. In addition, we compare the results obtained from the approximate formula with those derived from the exact closed-form formula and from the Monte Carlo method. Finally, we analyze the impact of the skewness parameter on option prices after checking the accuracy of the approximations numerically.

Date: 2024
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DOI: 10.1080/1351847X.2023.2202821

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