Research On the Pricing of Oil Spread Option Based on Geometric Brownian Motion

Ainan Chen; Yuting Huang; Bowen Tian

doi:10.54691/bcpbm.v37i.3576

Authors

Ainan Chen
Yuting Huang
Bowen Tian

DOI:

https://doi.org/10.54691/bcpbm.v37i.3576

Keywords:

spread option, geometric Brownian motion, Asian option, European option, WTI crude oil & heating oil.

Abstract

On Monday, 21 April 2020, for the first time ever in its existence, the price of US crude oil declined. This study constructs a spread option using geometric Brownian motion and simulates the prices of WTI oil and heating oil, both from the Chicago Mercantile Exchange (CME) Group, and processes and simulates them on a Microsoft Excel basis. This paper predicts the pricing of spread option by the heating oil price and compared to the Asian and European options. The results obtained showed that the volatility of the heating oil price affects the premium of the spread option. The significance of this paper is for investors to compare different options and find profit opportunities to make investment decisions.

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