PRICING AND HEDGING EUROPEAN OPTIONS ON FUTURES SPREADS USING THE BACHELIER SPREAD OPTION MODEL

Schaefer, Matthew P.

PRICING AND HEDGING EUROPEAN OPTIONS ON FUTURES SPREADS USING THE BACHELIER SPREAD OPTION MODEL

Matthew P. Schaefer

No 19055, 2002 Conference, April 22-23, 2002, St. Louis, Missouri from NCR-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management

Abstract: The Bachelier model for pricing options on futures spreads (OFS) assumes changes in the underlying .futures prices and spread follow unrestricted arithmetic Brownian motion (UABM). The assumption of UABM allows for a convenient analytic solution for the price of an OFS. The same is not possible under the more traditional assumption of geometric Brownian motion (GBM). Given the additional complexity of methods for pricing and hedging OFS using GBM such as Monte Carlo simulation and binomial trees, it is worth investigating how results from the Bachelier model compare to these other methods. The Bachelier model is presented and then extended to price an OFS with three underlying commodities. Hedge parameters for both models are provided. Results indicate that for OFS with sufficiently low volatility, differences between the Bachelier model and methods assuming GBM are quite small.

Keywords: Marketing (search for similar items in EconPapers)
Pages: 21
Date: 2002
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
https://ageconsearch.umn.edu/record/19055/files/cp02sc01.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ags:ncrtwo:19055

DOI: 10.22004/ag.econ.19055

Access Statistics for this paper

More papers in 2002 Conference, April 22-23, 2002, St. Louis, Missouri from NCR-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management Contact information at EDIRC.
Bibliographic data for series maintained by AgEcon Search ().