[R-SIG-Finance] Spread Approx Option question

Ben Cooper bcooper24 at gmail.com
Thu Jun 10 23:12:53 CEST 2010


I'm asking a question for a friend who couldn't post for to the site today.

He was trying to use the function Spread Approx Option from the
package fExoticOptions. The example he showed me was,

SpreadApproxOption(TypeFlag = "c", S1 = 28, S2 = 20, X = 7, Time = 1,
r = .05, sigma1 = 0, sigma2 = 0, rho = 1)

This is returning an option price of 0.9048. Shouldn't the option
price be the simple PV of 1 at the .05 rate? What is the math that
causes the difference here?

We've also run this same example through the Haug excel model that
comes with his book, and am getting a value of .9512. This is more in
line with what I'd expect.



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