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Pricing of compound exchange options

Author

Listed:
  • Becsky-Nagy, Patrícia
  • Száz, János
  • Vidovics-Dancs, Ágnes
  • Váradi, Kata

Abstract

This paper investigates the valuation of a novel financial derivative, the Compound Exchange option, which gives the holder the right to exchange two European call options with different underlying assets. Combining features of rainbow-, and compound options, a new class of exotic option is established. A closed-form pricing formula is derived for this novel option with underlying assets that have nonlinear payoffs, requiring a modification of the classic Margrabe framework. Probabilities and risk-neutral expected values under various scenarios are also calculated. The study contributes to the theory of exotic option pricing, providing practical insights for practitioners, academics, and risk managers.

Suggested Citation

  • Becsky-Nagy, Patrícia & Száz, János & Vidovics-Dancs, Ágnes & Váradi, Kata, 2025. "Pricing of compound exchange options," Finance Research Letters, Elsevier, vol. 85(PC).
    • Handle: RePEc:eee:finlet:v:85:y:2025:i:pc:s1544612325012875
    DOI: 10.1016/j.frl.2025.108029
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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