Long term spread option valuation and hedging

Long term spread option valuation and hedging

This paper investigates the valuation and hedging of spread options on two commodity prices which in the long run are cointegrated. For long term option pricing the spread between the two prices should therefore be modelled directly. This approach offers significant advantages relative to the traditional multi-factor spread option pricing model since the correlation between two asset returns is...

Pricing and hedging long-term options

Do long-term and short-term options contain di!erential information? If so, can long-term options better di!erentiate among alternative models? To answer these questions, we "rst demonstrate analytically that di!erences among alternative models usually may not surface when applied to short-term options, but do so when applied to longterm contracts. Using S&P 500 options and LEAPS, we "nd that s...

Hedging Long-term Commodity Risk With Dynamic Hedging Strategy

This essay focuses on the problem of hedging a long-term commitment to deliver a fixed amount of commodity, which often arises when the maturity of actively trading futures contracts on this commodity is limited to a few months. Problem is given and illustrated by real-world examples. Different hedging strategies are introduced. Finally, three stochastic pricing models proposed by Schwartz [17]...

Testing the volatility term structure using option hedging criteria

Option Valuation with Long- run and Short-run Volatility Components

ASSOCIE A :. Institut de Finance Mathématique de Montréal (IFM 2). Laboratoires universitaires Bell Canada. Réseau de calcul et de modélisation mathématique [RCM 2 ]. Réseau de centres d'excellence MITACS (Les mathématiques des technologies de l'information et des systèmes complexes) Les cahiers de la série scientifique (CS) visent à rendre accessibles des résultats de recherche effectuée au CI...