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Multi-asset options. Pricing model Ito lemma Continuous dividend case.

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Presentation on theme: "Multi-asset options. Pricing model Ito lemma Continuous dividend case."— Presentation transcript:

1 Multi-asset options

2 Pricing model

3 Ito lemma

4

5 Continuous dividend case

6 American style

7 Exchange option

8 similarity reduction

9 Reduced model

10 Closed form solution

11 Other examples

12 Options on many underlying

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14 Ito Lemma

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16 Quanto options

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21 Binomial model

22 Determination of p1,p2,p3,p4 see Kwok (1998) [pp ]

23 Monte-Carlo Simulation Monte-Carlo simulation is based on the risk- neutral valuation result. The expected payoff in a risk-neutral world is calculated using a sampling procedure. It is then discounted at the risk-free interest rate.

24 1. Sample a random path for in a risk-neutral world. 2. Calculate the payoff from the derivative. 3. Repeat steps one and two to get many sample values of the payoff from the derivative in a risk- neutral world. 4. Calculate the mean of the sample payoffs to get an estimate of the expected payoff in a risk-neutral world. 5. Discount the expected payoff at the risk-free rate to get an estimate of the value of the derivative.

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