[R-SIG-Finance] Spread Approx Option question

[Martin Becker]

I guess that there is a mistake in fExoticOptions' SpreadApproxOption() 
- function; discounting seems to be done twice (SpreadApproxOption() 
calls GBSOption(), which already has discounting, but inserts an 
additional factor exp(-r*t)).
At least, 0.9048*exp(0.05) gives the result you had expected.

Best - Martin


On 10.06.2010 23:12, Ben Cooper wrote:
> Hi,
>
> 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.
>
> Thanks
>
> Ben
>
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-- 
Dr. Martin Becker
Statistics and Econometrics
Saarland University
Campus C3 1, Room 217
66123 Saarbruecken
Germany