Multifactor option pricing: pricing bounds and option relations
by Sovan Mitra
International Journal of Applied Decision Sciences (IJADS), Vol. 3, No. 1, 2010

Abstract: Multifactor models are popular in industry and research but suffer from unstable weightings (similar to the problem encountered in multiple regressions). Consequently this poses an option pricing problem as prices can change significantly depending on these unstable weightings. We demonstrate that multifactor options are convex with respect to these weights and show how to determine pricing bounds and the relation to the put-call parity. We conduct numerical experiments to determine minimum multifactor option prices, put-call parity and analyse some interesting hedging results.

Online publication date: Wed, 17-Mar-2010

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