A Monte Carlo approach to value exchange options using a single stochastic factor
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.
|Date of creation:||May 2007|
|Date of revision:|
|Contact details of provider:|| Postal: Largo Papa Giovanni Paolo II, 1 -71100- Foggia (I)|
Web page: http://www.dsems.unifg.it
More information through EDIRC
When requesting a correction, please mention this item's handle: RePEc:ufg:qdsems:08-2007. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Luca Grilli)
If references are entirely missing, you can add them using this form.