Spread Options Research Articles

Recognize Flexible Malevolent Web pages in Real Time

Mobile precise internet web sites dissent drastically from their computer laptop equivalents in cloth, format and functionality. Sooner or later, present techniques to sight detrimental net internet internet sites rectangular movement now not probably to determine for such webpages. During this paper, we often typically have a propensity to format and exercising paintings over, a mechanism that distinguishes amongst terrible and benign mobile net net web sites. Activity over makes this energy of will supported normal picks of a net internet web page beginning with the quantity of iframes to the life of identified dishonourable cellular mobile cellphone numbers. First, we have a tendency to via attempting out show the requirement for mobile information strategies so installation a spread of new regular options that very correlate with cellular malicious pages. We will be predisposed to then use work over to a dataset of over 350,000 famous benign similarly to volatile cellular webpages and show 90th accuracy in splendor. In addition, we frequently normally normally have a tendency to discover, end up aware of and furthermore document choice of websites incomprehensible through Google Safe Surfing and furthermore Virus Total, however decided through art work over. Lastly, we will be inclined to growth a web browser extension victimization undertaking over to comfortable customers from damaging mobile internet web sites in length. In doing consequently, we provide the number one everyday assessment technique to view volatile cellular webpages

Spread Option Pricing on Single-Core and Parallel Computing Architectures

This paper introduces parallel computation for spread options using two-dimensional Fourier transform. Spread options are multi-asset options whose payoffs depend on the difference of two underlying financial securities. Pricing these securities, however, cannot be done using closed-form methods; as such, we propose an algorithm which employs the fast Fourier Transform (FFT) method to numerically solve spread option prices in a reasonable amount of short time while preserving the pricing accuracy. Our results indicate a significant increase in computational performance when the algorithm is performed on multiple CPU cores and GPU. Moreover, the literature on spread option pricing using FFT methods documents that the pricing accuracy increases with FFT grid size while the computational speed has opposite effect. By using the multi-core/GPU implementation, the trade-off between pricing accuracy and speed is taken into account effectively.

Representation of exchange option prices under stochastic volatility jump-diffusion dynamics

In this article, we provide representations of European and American exchange option prices under stochastic volatility jump-diffusion (SVJD) dynamics following models by Merton [Option pricing when underlying stock returns are discontinuous. J. Financ. Econ., 1976, 3(1-2), 125–144], Heston [A closed-form solution for options with stochastic volatility with applications to bond and currency options. Rev. Financ. Stud., 1993, 6(2), 327–343], and Bates [Jumps and stochastic volatility: Exchange rate processes implicit in Deutsche Mark options. Rev. Financ. Stud., 1996, 9(1), 69–107]. A Radon–Nikodým derivative process is also introduced to facilitate the shift from the objective market measure to other equivalent probability measures, including the equivalent martingale measure. Under the equivalent martingale measure, we derive the integro-partial differential equation that characterizes the exchange option prices. We also derive representations of the European exchange option price using the change-of-numéraire technique proposed by Geman et al. [Changes of numéraire, changes of probability measure and option pricing. J. Appl. Probab., 1995, 32(2), 443–458] and the Fourier inversion formula derived by Caldana and Fusai [A general closed-form spread option pricing formula. J. Bank. Finance, 2013, 37, 4893–4906], and show that these two representations are comparable. Lastly, we show that the American exchange option price can be decomposed into the price of the European exchange option and an early exercise premium.

ON SPREAD OPTION PRICING USING TWO-DIMENSIONAL FOURIER TRANSFORM

Spread options are multi-asset options with payoffs dependent on the difference of two underlying financial variables. In most cases, analytically closed form solutions for pricing such payoffs are not available, and the application of numerical pricing methods turns out to be nontrivial. We consider several such nontrivial cases and explore the performance of the highly efficient numerical technique of Hurd & Zhou[(2010) A Fourier transform method for spread option pricing, SIAM J. Financial Math. 1(1), 142–157], comparing this with Monte Carlo simulation and the lower bound approximation formula of Caldana & Fusai[(2013) A general closed-form spread option pricing formula, Journal of Banking & Finance 37, 4893–4906]. We show that the former is in essence an application of the two-dimensional Parseval’s Identity. As application examples, we price spread options in a model where asset prices are driven by a multivariate normal inverse Gaussian (NIG) process, in a three-factor stochastic volatility model, as well as in examples of models driven by other popular multivariate Lévy processes such as the variance Gamma process, and discuss the price sensitivity with respect to volatility. We also consider examples in the fixed-income market, specifically, on cross-currency interest rate spreads and on LIBOR/OIS spreads.

Modelling the underlying factors for flexible power plant valuation

In this article the value of a gas fired power plant is estimated through the decision of the power plant's operator to produce electricity. Spark spread options are used as a tool for cash flow evaluation, based on simulated electricity and natural gas prices. We choose to model electricity spot prices through the Schwartz-Smith two factor model and natural gas prices through a mean reverting model. Special characteristics of the plant are those of a typical combined cycle gas turbine power plant, which incorporates flexible and efficient technology. Decisions concerning at starting and running the power plant are made daily and for this reason, plant evaluation is crucial for power plant owners and potential investors. Moreover, investments in installing capacity are extremely costly, making the proper evaluation of the investment vital. We calculate annual profits under different cost scenarios and finding a more than 50% profit decrease when incorporating capacity factors.

Ins and outs in the surgical treatment of female stress urinary incontinence

Proper indication, preoperative diagnostics and final choice of surgical technique in the operative management of female stress urinary incontinence are subject to somewhat irrational, trend-based changes. For various reasons (insufficient reimbursement, poor expertise, limited therapeutic spectrum) preoperative urodynamic tests are increasingly thought to be unnecessary and are progressively replaced by perineal ultrasound despite lack of evidence. Since the AWMF guidelines (AWMF: Association of the Scientific Medical Societies in Germany) for the diagnosis and treatment of stress urinary incontinence in women were published, individualized planning of therapy is "out". Unconditional guideline adherence in certified pelvic floor centers, which have become very popular in Germany, has furthermore restricted the spread of therapeutic options due to minimum procedure number requirements. With regard to suburethral tension-free alloplastic slings, the retropubic version, which was temporarily unfashionable, has been experiencing arenaissance at the cost of the transobturator alternative. Single-incision slings were developed for the outpatient US market and have never become established in Germany due to lack of proof of superiority. In the setting of alimited spectrum of surgical procedures, adjustable sling systems offer promising treatment options for risk groups with acceptance of higher infection and erosion rates, thus gaining popularity. Reliable and comprehensive preoperative patient information comprising the whole spectrum of therapeutic options with individual risks and opportunities is key to prevent the impending ban of alloplastic implants in female stress incontinence surgery.

Valuation and applications of compound basket options

AbstractThis study investigates compound basket options, which are options on portfolios of options. Although they may be new to financial markets, they are available as equity basket options, equity spread options, stocks of holding companies, and collateralized debt obligations. Using moments of portfolio values, we provide formulas for pricing compound basket options. According to numerical analysis, a lower bound and a weighted average of bounds yield relatively small errors. Additionally, ignoring the compound feature increases the pricing error of equity basket options because the feature captures the capital structure and leverage effect of stock prices.

Modelling the underlying factors for flexible power plant valuation

In this article the value of a gas fired power plant is estimated through the decision of the power plant's operator to produce electricity. Spark spread options are used as a tool for cash flow evaluation, based on simulated electricity and natural gas prices. We choose to model electricity spot prices through the Schwartz-Smith two factor model and natural gas prices through a mean reverting model. Special characteristics of the plant are those of a typical combined cycle gas turbine power plant, which incorporates flexible and efficient technology. Decisions concerning at starting and running the power plant are made daily and for this reason, plant evaluation is crucial for power plant owners and potential investors. Moreover, investments in installing capacity are extremely costly, making the proper evaluation of the investment vital. We calculate annual profits under different cost scenarios and finding a more than 50% profit decrease when incorporating capacity factors.

Index Option Anomalies: How Real Are They?

We examine empirical “puzzles” documented in several high profile studies of the market for S&P 500 index options, such as the overpricing of out-of-the money (OTM) put options and at-the-money (ATM) straddles. We find that without any exception the theoretical bases of these studies have ignored persistent features of the index option market data such as the wide bid-ask spreads for OTM options, the partial segmentation of the market for puts and calls, and the inconsistency of the parameter estimates for different maturity options, which we document in our data. We present simple theoretical models of the end user option trader that incorporate these features and are parsimonious in terms of other assumptions. We find that these puzzles disappear under such conditions and conclude that these apparent anomalies are probably due to the omission of the above features.

Closed‐form approximations for spread options in Lévy markets

AbstractWe provide new closed‐form approximations for the pricing of spread options in three specific instances of exponential Lévy markets, ie, when log‐returns are modeled as Brownian motions (Black‐Scholes model), variance gamma processes (VG model), or normal inverse Gaussian processes (NIG model). For the specific case of exchange options (spread options with zero strike), we generalize the well‐known Margrabe formula (1978) that is valid in a Black‐Scholes model to the VG model under a homogeneity assumption.

Closed-Form Approximations for Spread Options in LLvy Markets

We provide new closed-form approximations for the pricing of spread options in three specific instances of exponential Levy markets, i.e., when log-returns are modeled as Brownian motions (Black-Scholes model), Variance Gamma processes (VG model) or Normal Inverse Gaussian processes (NIG model). For the specific case of exchange options (spread options with zero strike), we generalize the well-known Margrabe formula (1978) that is valid in a Black-Scholes model to the VG model under a homogeneity assumption.

Modeling calendar spread options

PurposeThe purpose of this paper is to derive a new option pricing model for options on futures calendar spreads. Calendar spread option volume has been low and a more precise model to price them could lead to lower bid-ask spreads as well as more accurate marking to market of open positions.Design/methodology/approachThe new option pricing model is a two-factor model with the futures price and the convenience yield as the two factors. The key assumption is that convenience follows arithmetic Brownian motion. The new model and alternative models are tested using corn futures prices. The testing considers both the accuracy of distributional assumptions and the accuracy of the models’ predictions of historical payoffs.FindingsPanel unit root tests fail to reject the unit root null hypothesis for historical calendar spreads and thus they support the assumption of convenience yield following arithmetic Brownian motion. Option payoffs are estimated with five different models and the relative performance of the models is determined using bias and root mean squared error. The new model outperforms the four other models; most of the other models overestimate actual payoffs.Research limitations/implicationsThe model is parameterized using historical data due to data limitations although future research could consider implied parameters. The model assumes that storage costs are constant and so it cannot separate between negative convenience yield and mismeasured storage costs.Practical implicationsThe over 30-year search for a calendar spread pricing model has not produced a satisfactory model. Current models that do not assume cointegration will overprice calendar spread options. The model used by the Chicago Mercantile Exchange for marking to market of open positions is shown to work poorly. The model proposed here could be used as a basis for automated trading on calendar spread options as well as marking to market of open positions.Originality/valueThe model is new. The empirical work supports both the model’s assumptions and its predictions as being more accurate than competing models.

Switching from oil to gas production in a depleting field

We derive an optimal decision rule with regards to making an irreversible switch from oil to gas production. The approach can be used by petroleum field operators to maximize the value creation from a petroleum field with diminishing oil production and remaining gas reserves. Assuming that both the oil and gas prices follow a geometric Brownian motion we derive an analytical solution for the exercise threshold. We also propose an explicit solution for the option value that is new to the literature. Numerical examples are used to demonstrate the threshold and option value for a generic petroleum field. Both the threshold and option value solutions are relevant for application to other real options cases with similar features (e.g. other types of switching options or a perpetual spread option).

Retrofitting carbon capture and storage to natural gas-fired power plants: A real-options approach

Abstract This paper presents a real-options approach to assess the value of retrofitting carbon capture and storage technology to an existing natural gas-fired base-load power plant. Operating in a deregulated electricity market, a power plant owner seeks to decide whether to retrofit and at what techno-economic conditions to retrofit carbon capture and storage. The value of the plant is determined based on clean spark spread options. Two alternative carbon capture and storage technologies, post-combustion and oxy-fuel combustion, are evaluated. Price uncertainties of electricity and natural gas are modeled as mean-reverting processes. The plant is abided by the emission reduction policy of carbon tax or price. Results show that a plant owner would opt for retrofitting post-combustion technology to an existing power plant if the carbon price hits to at least 140 dollars per ton of carbon dioxide, and would select oxy-fuel combustion technology if the carbon price moves further to 185 dollars per ton of carbon dioxide or above. Since parameters of carbon capture and storage vary widely across the literature, sensitivity tests of the expected values to different costs, prices, and volatility parameters are also presented for an insightful comparative view of which carbon capture and storage technology to adopt at what techno-economic conditions.

Pricing exchange options with correlated jump diffusion processes

We study the applicability to energy facilities of a model for correlated Poisson processes generated by self-decomposable jumps. In this context, the implementation of our approach, both to shape power or gas dynamics, and to evaluate transportation assets seen as spread or exchange options, is rather natural. In particular we first enhance the Merton market with two underlying assets making jumps at times ruled by correlated Poisson processes. Here however— at variance with the existing literature—the correlation is no longer provided only by a systemic common source of synchronous macroeconomic shocks, but also by a delayed synaptic propagation of the shocks themselves between the assets. In a second step, we consider a price dynamics driven by an exponential mean-reverting geometric Ornstein–Uhlenbeck process plus a compound Poisson process: a combination which is well suited for the energy markets. In our specific instance, for each underlying, we adopt a jumping price spot dynamics that has the advantage of being exactly treatable to find no-arbitrage conditions. As a result we are able to find closed form formulas for vanilla options, so that the price of the spread options can subsequently be calculated (again in closed form) using the Margrabe formula if the strike is zero (exchange options), or with some other suitable procedures available in the literature. The exchange option values obtained in our numerical examples show that, compared to the other Poisson models we analysed, the dependence introduced by the self-decomposition gives more relevance to the timing of the jumps and not only to their frequency.

On Numerical Methods for Spread Options

Spread options are multi-asset options whose payoffs depend on the difference of two underlying financial variables. In most cases, analytically closed form solutions for pricing such payoffs are not available, and the application of numerical pricing methods turns out to be non-trivial. We consider several such non-trivial cases and explore the performance of the highly efficient numerical technique of Hurd and Zhou (2010), comparing this with Monte Carlo simulation and the lower bound approximation formula of Caldana and Fusai (2013). We show that the former is in essence an application of the two–dimensional Parseval Identity. As application examples, we price spread options in a model where asset prices are driven by a multivariate normal inverse Gaussian (NIG) process, in a threefactor stochastic volatility model, as well as in examples of models driven by other popular multivariate Levy processes such as the variance Gamma process, and discuss the price sensitivity with respect to volatility. We also consider examples in the fixed–income market, specifically, on cross–currency interest rate spreads and on LIBOR/OIS spreads. In terms of FFT computation, we have used the FFTW library (see Frigo and Johnson (2010)) and we document appropriate usage of this library to reconcile it with the MATLAB ifft2 counterpart.

Information Asymmetry Effect and FX Options Bid-Ask Spreads

This paper investigates the information asymmetry effect on bid-ask spreads of dollar-euro currency options traded in over-the-counter market. We use a composite indicator of systemic stress (CISS) as a proxy for the information asymmetry effect and find that the impact of CISS on bid-ask spread is positive and significant during volatile periods when traders are asymmetrically informed. Further, for options with maturities of less than six months, we also find a positive significant relationship between bid-ask spreads and the ECB’s monetary policy announcements, suggesting informed option trading before, during and after such announcements. For longer-dated options, our result suggests that the information asymmetry effect is less pronounced in the bid-ask spreads. These results are confirmed using the Glosten and Milgrom (1985) model.

Flight of the Condors: Evidence on the Performance of Condor Option Spreads in Australia

This paper examines whether superior nominal and risk-adjusted returns can be generated using condor option spread strategies on a large capitalized Australian stock. Monthly Commonwealth Bank of Australia Ltd (CBA) condor option spreads are constructed from 2012 to 2015 and their returns established. Standard and alternative measures are used to determine the nominal and risk-adjusted performance of the spreads. The results show that the short put condor spread produces superior nominal and risk-adjusted returns, but seemingly underperformed when the upside potential ratio was taken into consideration. The long iron condor spread also offers reasonable returns across both performance metrics. On the other hand, the short call condor, long call condor, short iron condor and long put condor spreads did not perform as well on a nominal and risk-adjusted return basis. The results suggest that constructing spreads on the foundation of volatility preferences could be a driver of performance for condor option spreads strategies. For instance, short volatility condor spreads with negatively skewed return distribution shapes appear to add value, while long volatility condor spreads with positively skewed return distribution shapes seem to be less attractive over the sample period. Overall, condor option spreads demonstrate high risk-return profiles, offer versatility in their construction and intended pay-off outcomes, create value in some instances and can be executed across varying market conditions. It is suggested that risk averse investors best avoid condor option spreads, while those with above average risk tolerances may be well suited to the strategies, particularly short volatility-driven condor spreads.

Analytical approximation for spread option pricing in local volatility model

This paper introduces a methodology of analytical approximation in general European option-pricing case based on local volatility model and then apply it to price a European Spread Option. The approximation procedure is flexible in pricing financial derivatives with any form of volatility, drift rate, risk-free rate and payoff function. We also work out the explicit pricing formula up to the second-order approximation of spread option which is good-fitting compared with finite difference method and Monte Carlo simulation. The relative error compared to finite difference method is no more than 5%, which attests to the accuracy of our second-order closed-form formulas.

Two asset-barrier option under stochastic volatility

ABSTRACTFinancial products which depend on hitting times for two underlying assets have become very popular in the last decade. Three common examples are double-digital barrier options, two-asset barrier spread options and double lookback options. Analytical expressions for the joint distribution of the endpoints and the maximum and/or minimum values of two assets are essential in order to obtain quasi-closed form solutions for the price of these derivatives. Earlier authors derived quasi-closed form pricing expressions in the context of constant volatility and correlation. More recently solutions were provided in the presence of a common stochastic volatility factor but with restricted correlations due to the use of a method of images. In this article, we generalize this finding by allowing any value for the correlation. In this context, we derive closed-form expressions for some two-asset barrier options.