Efficient Pricing of Spread Options with Stochastic Rates and Stochastic Volatility

Spread options are notoriously difficult to price without the use of Monte Carlo simulation. Some strides have been made in recent years through application Fourier transform methods; however, date, these methods only applied specific underlying processes including two-factor geometric Brownian motion (gBm) and three-factor stochastic volatility models. In this paper, we derive characteristic function for two-asset Heston–Hull–White model with a full correlation matrix apply two-dimensional fast (FFT) method equity spread options. Our findings suggest that FFT is up 50 times faster than yields similar accuracy. Furthermore, interest rates can material impact on long-dated out-of-the-money