Pricing of Spread Options on a Bivariate Jump Market and Stability to Model Risk |
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| Authors: | Fred Espen Benth Giulia Di Nunno Maren Diane Schmeck |
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| Institution: | 1. Center of Mathematics for Applications, University of Oslo, PO BOX 1053 Blindern, N-0316 Oslo, Norway;2. Norwegian School of Economics and Business Administration, Helleveien 30, N-5045 Bergen, Norway;3. Department of Mathematics, University of Cologne, Weyertal 86–90, 50931 Cologne, Germany |
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| Abstract: | AbstractWe study the pricing of spread options and we obtain a Margrabe-type formula for a bivariate jump-diffusion model. Moreover, we study the robustness of the price to model risk, in the sense that we consider two types of bivariate jump-diffusion models: one allowing for infinite activity small jumps and one not. In the second model, an adequate continuous component describes the small variation of prices. We illustrate our computations by several examples. |
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| Keywords: | spread options jump-diffusion stability dual measure model risk |
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