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Pricing and hedging spread options. (English) Zbl 1033.60069
There is already extensive literature on spread options in the equity, fixed income, foreign exchange and commodities markets. The authors patiently and cleverly put together the material scattered across recent textbooks and journal papers. After presenting a general overview of their common features, they describe in detail the mathematical framework and the numerical algorithms used to model, price and hedge these options. Special attention is given to spread options on physical commodities, such as energy markets. The authors explain how the pricing and hedging algorithms can be implemented in the framework of models for both the spot price dynamics and the forward curve dynamics.

MSC:
60H10 Stochastic ordinary differential equations (aspects of stochastic analysis)
91G20 Derivative securities (option pricing, hedging, etc.)
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