Title: Multifactor option pricing: pricing bounds and option relations

Authors: Sovan Mitra

Addresses: Department of Mathematics, Brunel University, Kingston Lane, Uxbridge, Middlesex, UB8 3PH, UK

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.

Keywords: option pricing; multifactor options; pricing bounds; put-call parity; prices; unstable weightings; multiple regressions; convex options; hedging; applied decision sciences.

DOI: 10.1504/IJADS.2010.032238

International Journal of Applied Decision Sciences, 2010 Vol.3 No.1, pp.15 - 33

Available online: 17 Mar 2010 *

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