On the sensitivity analysis of spread options using Malliavin calculus

Farai Julius Mhlanga, Shadrack Makwena Kgomo

Published 2021-06-09Version 1

In this paper we derive tractable formulae for price sensitivities of two-dimensional spread options using Malliavin calculus. In particular, we consider spread options with asset dynamics driven by geometric Brownian motion and stochastic volatility models. Unlike the fast Fourier transform approach, the Malliavin calculus approach does not require the joint characteristic function of underlying assets to be known and is applicable to spread options with discontinuous payoff functions. The results obtained reveal that the Malliavin calculus approach gives the price sensitivities in terms of the expectation of spread option payoff functional multiplied with some random variables (Malliavin weights) which are independent of the payoff functional. This is consistent with results in Fournie et al. [1]. The results also show the flexibility of Mallavin calculus approach when applied to spread options.