A Monte Carlo approach to value exchange options using a single stochastic factor

Giovanni Villani ()

Quaderni DSEMS from Dipartimento di Scienze Economiche, Matematiche e Statistiche, Universita' di Foggia

Abstract: Exchange options give the holder the right to exchange one risky asset V for another risky asset D. The asset V is referred to as the optioned (underlying) asset, while D is the delivery asset. So, when an exchange option is valued, we generally are exposed to two sources of uncertainity, namely we have two stochastic variables. Exchange options arise quite naturally in a number of signicant nancial arrangements including bond futures contracts, investment performance, options whose strike price is an average of the experienced underlying asset price during the life ot the option and so on. In this paper we propose some algorithms to estimate exchange options by Monte Carlo simulation reducing the bi-dimensionality of valuation problem to single stochastic factor.

Keywords: Exchange Options; Monte Carlo Simulations. (search for similar items in EconPapers)
JEL-codes: C15 G13 (search for similar items in EconPapers)
Date: 2007-05
New Economics Papers: this item is included in nep-cmp and nep-fmk
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