Locational Spread Options with Stochastic Correlation

Contrary to the common assumption, the correlation between financial derivatives may not be constant across time. This thesis analyses the role of stochastic correlation in modeling for locational spread options for natural gas. We first derive a model with Ornstein–Uhlenbeck process between two spread assets with constant correlation and then a combination of the Ornstein–Uhlenbeck and Jacobi process is used to model a stochastic correlation. The Margrabe formula is employed to evaluate options prices with constant correlation, the solution for which is used to compare with Monte Carlo simulations for stochasticity. Comparing the results, we find out why stochastic correlation is more important in real markets.

Name thesis:degree_name

Master of Science (MSc)

Discipline thesis:degree_discipline

Mathematics & Statistics

Grantor dc:publisher.institution

Graduate Studies

Year dc:date.issued

2023

Author dc:creator

• Ali, Syeda Fareeha

Advisor dc:contributor.advisor

• Ware, Antony

Committee members dc:contributor.committeemember

• Swishchuk, Anatoliy
• Zinchenko, Yuriy

• Mathematical Finance

Statement dc:rights

• University of Calgary graduate students retain copyright ownership and moral rights for their thesis. You may use this material in any way that is permitted by the Copyright Act or through licensing that has been assigned to the document. For uses that are not allowable under copyright legislation or licensing, you are required to seek permission.

Language dc:language.iso

en

DOI

https://dx.doi.org/10.11575/PRISM/dspace/41036

OAI identifier oai:identifier

oai:ucalgary.scholaris.ca:1880/116191