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2020•Mathematical Problems in EngineeringOpen access

European Spread Option Pricing with the Floating Interest Rate for Uncertain Financial Market

Lidong Zhang, Yanmei Sun, Xiangbo Meng

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Abstract

In this paper, we investigate the pricing problems of European spread options with the floating interest rate. In this model, uncertain differential equation and stochastic differential equation are used to describe the fluctuation of stock price and the floating interest rate, respectively. We derive the pricing formulas for spread options including the European spread call option and the European spread put option. Finally, numerical algorithms are provided to illustrate our results.

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What this paper is about

In this paper, we investigate the pricing problems of European spread options with the floating interest rate. In this model, uncertain differential equation and stochastic differential equation are used to describe the fluctuation of stock price and the floating interest rate, respectively. We derive the pricing formulas for spread options including the European spread call option and the European spread put option. Finally, numerical algorithms are provided to illustrate our results.

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Available abstract

In this paper, we investigate the pricing problems of European spread options with the floating interest rate. In this model, uncertain differential equation and stochastic differential equation are used to describe the fluctuation of stock price and the floating interest rate, respectively. We derive the pricing formulas for spread options including the European spread call option and the European spread put option. Finally, numerical algorithms are provided to illustrate our results.

Key concepts: Interest rate, Valuation of options, Stochastic differential equation, Finite difference methods for option pricing, Call option, Differential (mechanical device), Econometrics, Financial economics

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