Title

:

Closed-form Approximations for Pricing and Hedging Spread Options

Speaker

:

Prof. Shi-Jie Deng

Date

:

May 16th, 2008 (Friday)

Time

:

4:30 p.m. - 5:30 p.m.

Venue

:

Room 513

William M.W. Mong Engineering Building

(Engineering Building Complex Phase 2)

CUHK

We develop new closed-form approximation methods for pricing
spread options on two assets as well as a basket of assets.
Numerical analysis shows that our methods are more accurate
than existing analytical approximations. Our methods are also
extremely fast, with computing time more than two orders of
magnitude shorter than one-dimensional numerical integration.
We also develop closed-form approximations for the greeks of
spread options. In addition, we analyze the price sensitivities
of spread options and provide lower and upper bounds for
digital spread options. Our methods enable the accurate pricing
of a bulk volume of spread options with different specifications
in real time, which offers traders a potential edge in financial
markets. The closed-form approximations of greeks serve as
valuable tools in financial applications such as dynamic hedging
and Value-at-Risk calculations. The closed-form formulas for
spread options also help us understand and design real and
financial contracts with embedded spread-option-like features.

(Based on joint works with Minqiang Li and Jieyun Zhou)

Shi-Jie Deng is an Associate Professor in H. Milton Stewart
School of Industrial and Systems Engineering at the Georgia
Institute of Technology. He holds a Ph.D. in Industrial
Engineering and Operations Research from the University of
California at Berkeley. Dr. Deng actively researches and
teaches in financial modeling in energy markets, electricity
transmission pricing, financial asset pricing and real options
valuation, and the procurement and contract theory in supply
chains. He is the director of the Master of Science Program
in Quantitative & Computational Finance at Georgia Tech. He
received the CAREER Award from the National Science Foundation
in 2002. Dr. Deng has consulted with several private and public
companies on issues of energy derivative pricing, structured
transactions, and risk management in the deregulated
electricity industry.

Host

:

Prof. Chen Nan

Tel

:

(852) 2609-8237

Email

:

nchen@se.cuhk.edu.hk

Enquiries

:

Prof. Nan Chen or Prof. Sean X. Zhou

:

Department of Systems Engineering and Engineering Management

CUHK

Website

:

http://www.se.cuhk.edu.hk/~seg5810

Email

:

seg5810@se.cuhk.edu.hk