Spread Options on Commodity Prices

Abstract

In this work we perform a pricing exercise of different types of spread options; we particularly focus on European calendar and crack spread options. We present the expressions followed by the joint characteristic functions of the underlying log-prices for a panel of bivariate processes. The expressions we obtain for calendar spread options are new in the literature. We follow different methodologies for option valuation, and compare accuracy and processing times obtained using each one.

Keywords: Commodities, crack spread option, calendar spread option, joint characteristic function, Fourier inversion, Fourier transform, analytical solution

JEL Classification: C51, C63, G13