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Three asset spread options (Dual spread options)
Posted: May 21st, 2004, 5:22 pm
by clement14
Three asset spread options(dual spread options) payoff isCall=max{0,(S1-S2)-X,(S3-S2)-X}Why not have {(S3-S1)-X}?Could you tell me why? Thank you.
Three asset spread options (Dual spread options)
Posted: May 22nd, 2004, 5:52 am
by gammashark
Intuitively, as long as S2 and X are constant, I think you should be able to make the payoff change you suggest. Why do you think you can't? I presume you meant max (S3-S1-X, 0).
Three asset spread options (Dual spread options)
Posted: May 22nd, 2004, 10:37 am
by Graeme
If s_1 = 2, s_2 = 3, s_3 = 4, X = 1then the 'simplification' is invalid, with or without a max. Why do you think s_2 can simply be eliminated? There is usually a certain conservation of energy when it comes to arithmetic.
Three asset spread options (Dual spread options)
Posted: May 22nd, 2004, 12:26 pm
by clement14
I can write this payoffCall=max{0,(S1-S2)-X,(S3-S2)-X,(S3-S1)-X}but it is seemly invalid, but I don't know why can't I write this kind of payoff?
Three asset spread options (Dual spread options)
Posted: May 22nd, 2004, 5:06 pm
by gammashark
Good point - learned something today. Thanks.
Three asset spread options (Dual spread options)
Posted: May 22nd, 2004, 7:59 pm
by Graeme
QuoteOriginally posted by: clement14I can write this payoffCall=max{0,(S1-S2)-X,(S3-S2)-X,(S3-S1)-X}but it is seemly invalid, but I don't know why can't I write this kind of payoff?Sorry, I don't think I understand your question any more....
Three asset spread options (Dual spread options)
Posted: May 23rd, 2004, 1:15 am
by clement14
If the payoff is right, Call=max{0,(S1-S2)-X,(S3-S2)-X}then we can say the payoff is wrong, Call=max{0,(S3-S2)-X,(S3-S1)-X} or Call=max{0,(S1-S2)-X,(S3-S1)-X}because "dual spread " assumes that (S3-S1) is right, (S1-S2), (S3-S2) are mispricing. that's my thought, but I think a little strange.
Three asset spread options (Dual spread options)
Posted: May 23rd, 2004, 11:26 am
by Graeme
QuoteOriginally posted by: clement14If the payoff is right, Call=max{0,(S1-S2)-X,(S3-S2)-X}then we can say the payoff is wrong, Call=max{0,(S3-S2)-X,(S3-S1)-X} or Call=max{0,(S1-S2)-X,(S3-S1)-X}because "dual spread " assumes that (S3-S1) is right, (S1-S2), (S3-S2) are mispricing. that's my thought, but I think a little strange.Sorry, I certainly don't understand your question any more....
Three asset spread options (Dual spread options)
Posted: May 23rd, 2004, 4:35 pm
by clement14
ha~ha~sorry, my presentation is not very good.Does anyone understand my question?Thank you, Graeme, to look at my strange question once again.
Three asset spread options (Dual spread options)
Posted: May 23rd, 2004, 9:53 pm
by hijavata
QuoteOriginally posted by: clement14Three asset spread options(dual spread options) payoff isCall=max{0,(S1-S2)-X,(S3-S2)-X}Why not have {(S3-S1)-X}?Could you tell me why? Thank you.If you simply have c = max {0,(s1-s3)-x} it would not be a dual spread it would be an ordinary spread option. The structures of the payoffs are not the same for the two options at all. Unless s2 and s3 are perfectly +correlated, and happened to be at the same level (s2=s3), the two payoffs will never be the same… Also if the same was true for S1 and s2i am not sure either what is your question, because it is kind of confusing... maybe this is not what you have asked!