Fourier inversion formulas for multiple-asset option pricing

Bruno Feunou and Tafolong Ernest
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Tafolong Ernest: National Bank of Canada, 1155 Metcalfe Street, Montreal, QC H3B 4S9, Canada

Studies in Nonlinear Dynamics & Econometrics, 2015, vol. 19, issue 5, 531-559

Abstract: Plain vanilla options have a single underlying asset and a single condition on the payoff at the expiration date. For this class of options, a well known result of Duffie, Pan, and Singleton (Duffie, D., J. Pan, and K. Singleton. 2000. “Transform Analysis and Asset Pricing for Affine Jump-Diffusions.” Econometrica 68: 1343–1376. http://dx.doi.org/10.1111/1468-0262.00164.) shows how to invert the characteristic function to obtain a closed-form formula for their prices. However, multiple-asset and multiple-condition derivatives such as rainbow options cannot be priced within this framework. This paper provides an analytical solution for options whose payoffs depends on two or more conditions. We take the advantage of the inversion of the Fourier transform, resorting to neither Black and Scholes’s framework, nor the affine models’s settings. Numerical experiments based on the aforementioned class of derivatives are provided to illustrate the usefulness of the proposed approach.

Keywords: derivatives pricing; Fourier-Stieltjes transform; multiple triggers payoff (search for similar items in EconPapers)
JEL-codes: G12 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (2)

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DOI: 10.1515/snde-2014-0034

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