[R-SIG-Finance] Spread Approx Option question

[Ben Cooper]

Thanks to everyone for their help. I have it working now and the
results look correct.

Have a great weekend.

Ben


On Fri, Jun 11, 2010 at 9:07 AM, Martin Becker
<martin.becker at mx.uni-saarland.de> wrote:
> 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
>
>