Previous Topic

Next Topic

Extreme Spread Options

The value of a European extreme spread option can be found with the Bermin(1996) formula :

where

,

If the option is a call then ? = 1 and M0 the observed maximum.

If the option is a call then ? = -1 and M0 the observed minimum.

where

w = Price of European option

F1 = Price on futures contract one

F2 = Price on futures contract two

X = Strike price

T = Time to maturity

r = risk free rate

= Volatility of future one

= Volatility of future two

= Correlation between the two contracts

N = The cumulative normal distribution function

 

See Also

oX_ExtremeSpread( ) Functions

Return to www.derivativepricing.com website

Copyright 2013 Hedgebook Ltd.