Title: Explicit approximations of multi-asset option prices including Greeks

Authors: Reik H. Börger

Addresses: Derendorfer Str. 74, 40479 Düsseldorf, Germany

Abstract: In this article, we give a lower bound approximation to a stochastic programme that is typical for many complex financial derivatives, e.g., Bermudan options, Rainbow options and swing contracts. The approximation is based on an algorithm that does not require any simulation but uses a well-known spread option pricing formula. Since the method explicitly computes lower bounds for the claim's value, sensitivities such as deltas and gammas are available as well as derivatives with respect to correlations and other inputs. Our resulting procedure is a powerful and practical tool for the pricing and risk analysis of exotic payoff structures. As such, it is useful in the day-to-day environment of financial institutions.

Keywords: multi asset options; option pricing; Greeks; option sensitivities; lower bound; financial derivatives; rainbow options; swing options; spread options; risk management; exotic payoffs; risk-neutral pricing; risk assessment.

DOI: 10.1504/IJPAM.2014.064381

International Journal of Portfolio Analysis and Management, 2014 Vol.1 No.4, pp.314 - 329

Received: 21 Jul 2012
Accepted: 11 Feb 2013

Published online: 30 Aug 2014 *

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