Pricing Spread Options with Stochastic Interest Rates

Abstract EN

Although spread options have been extensively studied in the literature, few papers deal with the problemof pricing spread options with stochastic interest rates.

This study presents three novel spread optionpricing models that permit the interest rates to be random.

The paper not only presents a good approachto formulate spread option pricing models with stochastic interest rates but also offers a new test bed tounderstand the dynamics of option pricing with interest rates in a variety of asset pricing models.

Wediscuss the merits of the models and techniques presented by us in some asset pricing models.

Finally, weuse regular grid method to the calculation of the formula when underlying stock returns are continuous anda mixture of both the regular grid method and a Monte Carlo method to the one when underlying stockreturns are discontinuous, and sensitivity analyses are presented.