Making the best of best-of

Tristan Guillaume (1)

1 THEMA - Théorie économique, modélisation et applications

This paper extends the analytical valuation of options on the maximum or the minimum of several risky assets in several directions. The first extension consists in including more assets in the payoff and making the latter more flexible by adding knock-in and knock-out provisions. The second extension consists in pricing these contracts in a multivariate jump-diffusion framework allowing for a stochastic two-factor term structure of interest rates. In both cases, explicit formulae are provided which yield prices quasi instantaneously and with utmost precision. Hedge ratios can be easily and accurately derived from these formulae.

Mots clés: multiasset option; rainbow option; best-of option; option on the maximum or the minimum; dimension; multivariate normal distribution

Domaines: Economies et finances; Pricing [q-fin.PR]

Tristan Guillaume. Making the best of best-of. Review of Derivatives Research, 2008, 11, pp.1-39. ⟨hal-00924256⟩