Cutting edge: Incorporating forex volatility into commodity spread option pricing

Spread option pricing: importance of forex risk factors illustrated

Canadian currency

Several different forms of spread options are used in energy markets. The most popular ones are European call options on the spread of energy price pairs. If we consider energy prices in different locations and times as individual commodities, a spread option can be generally considered as the right to exchange one unit of a commodity for a certain amount of units of another commodity at given strike price. Examples of spread options are:

(1) Locational spread options: gas transportations

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