Fourier Inversion Formulas for Multiple-Asset Option Pricing

Bruno Feunou and Ernest Tafolong

Staff Working Papers from Bank of Canada

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 (2000) 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. Utilizing inversion of the Fourier transform - and resorting to neither the Black-Scholes framework nor the affine models settings - the authors provide an analytical solution for options whose payoffs depend on two or more conditions. Numerical experiments based on the multiple-asset and multiple-condition derivatives are provided to illustrate the usefulness of the proposed approach.

Keywords: Asset; Pricing (search for similar items in EconPapers)
JEL-codes: G12 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2015
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Citations: View citations in EconPapers (3)

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Journal Article: Fourier inversion formulas for multiple-asset option pricing (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:15-11

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