Author(s)

Xi Cheng, Luhua Tian and Jiayu Hu

Corresponding Author

Xi Cheng

ABSTRACT

The varieties of spread options trading existing in the current futures exchange are much smaller than other types of options. To promote the development of the market, it is necessary to investigate the pricing and application of such exotic options. This paper, investigates the influencing factors of spread options and observes their corresponding market characteristics. In order to carry out simulations, the Monte-Carlo method and the Black-Scholes theorem are utilized for pricing and observation comparison of three groups of underlying assets. Based on the analysis, the assets in the group should be highly correlated in order to apply the spread options in the market. The intrinsic is that the higher the correlation is the more reasonable for the trader to construct the spread option, which can be used as the function of hedging. Besides, a well-performed spread option ought to possess the advantages of low-interest rates and easy prediction. These results shed light on spread option implementation in the future market.

KEYWORDS

Spread option, Monte-Carlo simulation, Black-Scholes Model