Pricing and hedging Margrabe options with stochastic volatilities

Elisa Alòs () and Thorsten Rheinländer
Additional contact information
Elisa Alòs: https://www.upf.edu/web/econ/faculty/-/asset_publisher/6aWmmXf28uXT/persona/id/3418685

Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra

Abstract: A Margrabe or exchange option is an option to exchange one asset for another. In a general stochastic volatility framework, by taking the second asset as a numeraire,we derive pricing as well as approximate pricing formulae for Margrabe options. The correlated Stein & Stein and the 3=2 model are studied as particular examples. Moreover, we derive the general mean-variance optimal hedging strategy and show that it is a delta-hedge only in case of zero correlation between asset prices and volatility.

Keywords: Stochastic volatility; Margrabe options; change of numeraire; mean-variance hedging; Malliavin calculus (search for similar items in EconPapers)
Date: 2015-03, Revised 2017-02
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
https://econ-papers.upf.edu/papers/1475.pdf Whole Paper (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:upf:upfgen:1475

Access Statistics for this paper

More papers in Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra
Bibliographic data for series maintained by ( this e-mail address is bad, please contact ).