On the optimal choice of strike conventions in exchange option pricing

Elisa Al\`os and Michael Coulon

Papers from arXiv.org

Abstract: An important but rarely-addressed option pricing question is how to choose appropriate strikes for implied volatility inputs when pricing more exotic multi-asset derivatives. By means of Malliavin Calculus we construct an optimal log-linear strikevconvention for exchange options under stochastic volatility models. This novel approach allows us to minimize the difference between the corresponding Margrabe computed price and the true option price. We show that this optimal convention does not depend on the specific stochastic volatility model chosen. Numerical examples are given which provide strong support to the new methodology.

Date: 2018-07
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://arxiv.org/pdf/1807.05396 Latest version (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1807.05396

Access Statistics for this paper

More papers in Papers from arXiv.org
Bibliographic data for series maintained by arXiv administrators ().