Pricing exchange options under stochastic correlation

Enrique Villamor and Pablo Olivares

The North American Journal of Economics and Finance, 2024, vol. 73, issue C

Abstract: In this paper we study the pricing of exchange options when the underlying assets have stochastic volatility and stochastic correlation. An approximated closed-form formula based on a Taylor expansion of the conditional Margrabe price is proposed. The problem is illustrated within the framework of the exchange between two different types of oil commodities.

Keywords: Exchange options; Stochastic correlation; Taylor expansion; Ornstein–Uhlenbeck process (search for similar items in EconPapers)
JEL-codes: C32 C65 G13 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:73:y:2024:i:c:s1062940824000780

DOI: 10.1016/j.najef.2024.102153

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