Entropic Two-Asset Option

Tumellano Sebehela

Chapter 32 in Handbook of Investment Analysis, Portfolio Management, and Financial Derivatives:In 4 Volumes, 2024, pp 1077-1128 from World Scientific Publishing Co. Pte. Ltd.

Abstract: This chapter extends the Margrabe formula such that it is suitable for accounting for any type jump of stocks. Despite the fact that prices of an exchange option are characterized by jumps, it seems no study has explored those price jumps of an exchange option. The jump in this chapter is illustrated by a Poisson process. Moreover, the Poisson process can be extended into Cox process in case there is more than one jump. The results illustrate that incompleteness in an exchange option leads to a premium which in turn increases an option value while hedging strategies reveal mixed-bag type of results.

Keywords: Financial Accounting; Financial Auditing; Mutual Funds; Hedge Funds; Asset Pricing; Options; Portfolio Analysis; Risk Management; Investment Analysis; Momentum Analysis; Behavior Analysis; Futures; Index Futures; CDCs; Financial Econometrics; Statistics; Financial Derivatives; Financial Accounting (search for similar items in EconPapers)
JEL-codes: G1 G11 G12 G3 M41 M42 (search for similar items in EconPapers)
Date: 2024
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