Pricing power exchange options with correlated jump risk

This paper extends the framework of Blenman and Clark (2005) to value power exchange options by incorporating correlated jump risk. A typical class of jump-diffusion processes are used to describe the values of two risky assets, and a common jump process is introduced to allow for correlated jump risk. In this framework, I obtain an explicit pricing formula for power exchange options, and illustrate the effects of common jump risk as well as the difference between the impacts of idiosyncratic and common jump risk.