Entropic Two-Asset Option

Tumellano Sebehela

Chapter 34 in Handbook of Financial Econometrics, Mathematics, Statistics, and Machine Learning:(In 4 Volumes), 2020, pp 1295-1344 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 whilst hedging strategies reveal mixed-bag type of results.

Keywords: Financial Econometrics; Financial Mathematics; Financial Statistics; Financial Technology; Machine Learning; Covariance Regression; Cluster Effect; Option Bound; Dynamic Capital Budgeting; Big Data (search for similar items in EconPapers)
JEL-codes: C01 C1 G32 (search for similar items in EconPapers)
Date: 2020
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