Basis Options Delta Hedging
21 Pages Posted: 6 Oct 2005
Date Written: September 23, 2005
Abstract
The difference between a basis option pricing model on futures or forward contracts, assuming both underlying futures contracts follow geometric Brownian motion, and a basis option pricing model on futures contracts, assuming both underlying securities follow arithmetic Brownian motion are non material from a risk management perspective. We show this by demonstrating that the differences in the deltas and gammas of the two models are not materially different. This being the case, the normal assumption on the underlying futures contracts can be made easing the risk management computational burden.
Keywords: Options, Options on Futures Spreads, Lognormal, Normal
JEL Classification: G13
Suggested Citation: Suggested Citation