Abstract

In financial markets, spread option is a derivative security with two underlying assets and the payoff of the spread option depends on the difference of these assets. We consider American style spread option which allows the owners to exercise it at any time before the maturity. The complexity of pricing American spread option is that the boundary of the corresponding partial differential equation which determines the option price is unknown and the model for the underlying assets is two-dimensional.In this dissertation, we incorporate the stochasticity to the interest rate and assume that it satisfies the Vasicek model or the CIR model. We derive the partial differential equations with terminal and boundary conditions which determine the American spread option with stochastic interest rate and formulate the associated free boundary problem. We convert the free boundary problem to the linear complimentarity conditions for the American spread option, so that we can go around the free boundary and compute the option price numerically. Alternatively, we approximate the option price using methods based on the Monte Carlo simulation, including the regression-based method, the Lonstaff and Schwartz method and the dual method. We make the comparisons among the option prices derived by the partial differential equation method and Monte Carlo methods to show the accuracy of the result.

Degree

PhD

College and Department

Physical and Mathematical Sciences; Mathematics

Rights

http://lib.byu.edu/about/copyright/

Date Submitted

2016-06-01

Document Type

Dissertation

Handle

http://hdl.lib.byu.edu/1877/etd8710

Keywords

American Spread Option, Stochastic Interest Rate, Free Boundary Problem, Linear Complementarity Conditions, CIR Model, Monte Carlo Simulation

Included in

Mathematics Commons

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