Klyueva_Ekaterina.pdf (1.9 MB)
Pricing and hedging tools for spread option contracts
thesis
posted on 2021-05-24, 10:35 authored by Ekaterina KlyuevaThis thesis examines the problem of pricing and hedging spread options under market models with jumps driven by a Compound Poisson Process. Extending the work of Deng, Li and Zhou we derive the price approximation for Spread options in jump-diffusion framework. We find that the proposed model accurately approximates option prices and exhibits reasonable behavior when tested for sensitivity to the model parameters. Applying the method of Lamberton and Lepeyre, we minimize the squared error between the Spread option price and the hedge portfolio to arrive to an optimal hedging strategy for discontinuous underlying price modes. Additionally, we propose an alternative average Delta-hedging strategy that is derived by conditioning the underlying price processes on the number of jumps and summing over all the possible jump combinations; such an approach allows us to revert to a hedging problem in a Black-Scholes framework. Although the average Delta-hedging strategy offers a significantly simpler approach to hedge Spread options, we conclude that the former strategy performs better by examining the Profit and Loss Probability Density Function of the two competing strategies. Finally, we offer a model parameter calibration algorithm and test its performance using
the transitional Probability Density Functions.
History
Language
engDegree
- Master of Applied Science
Program
- Applied Mathematics
Granting Institution
Ryerson UniversityLAC Thesis Type
- Thesis