Black Basket Analytics for Mid-Curves and Spread-Options

20 Pages Posted: 30 Jun 2020 Last revised: 2 Nov 2020

Date Written: June 23, 2020

Abstract

To price mid-curve or spread options we need flexible joint distributions of two underlying rates with fixed marginals. A Copula approach is a standard method to produce such joint distributions.It has, however, several drawbacks, especially, a low number of free parameters. For example, the most popular Gaussian copula has one parameter -- correlation. Another complication with the Copulas is its numerical realization: a two dimensional numerical integration underlying the price can be slow and potentially noisy, eps. for sensitivities.

In this paper we propose a new way to unify two marginal distributions such that it has a large number of parameters permitting to calibrate to mid-curve or spread options with multiple strikes. The method is based on a basket of log-normal processes (called Black Basket) having a fast analytical formulation and attractive simplicity.

Keywords: Spread options, mid curve, Copula, correlation freedom

JEL Classification: C1, C3, C5, C6, E43, G12, G13

Suggested Citation

Antonov, Alexandre, Black Basket Analytics for Mid-Curves and Spread-Options (June 23, 2020). Available at SSRN: https://ssrn.com/abstract=3633709 or http://dx.doi.org/10.2139/ssrn.3633709

Alexandre Antonov (Contact Author)

Danske Bank - Danske Markets ( email )

Holmens Kanal 2-12
DK-1092 Copenhagen K
Denmark

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
258
Abstract Views
735
rank
141,685
PlumX Metrics