Mathematical analysis of the two-color partial rainbow options

Der Chen Chang, Eric C. Chang, Haitao Fan, Duy Minh Nhieu

Research output: Contribution to journalArticlepeer-review

1 Scopus citations

Abstract

In this article, two-color partial rainbow options (TCPROs) are proposed. Such options allow holders to choose between the two underlying vanilla options at a specified time before expiry. Examples of benefits of TCPROs to both holders and issuers are given. Pricing formulae for such options are derived. The extra premium due to the choosing feature of a TCPRO, called the price of choice, is a nonnegative decreasing function of the correlation coefficient of the two underlying assets and the remaining time to choose. Numerical results are obtained to show that while TCPROs are more valuable than the underlying vanilla options, their risk parameters such as delta and gamma are smaller.

Original languageEnglish
Pages (from-to)737-757
Number of pages21
JournalInternational Journal of Phytoremediation
Volume84
Issue number7
DOIs
StatePublished - Jul 2005

Keywords

  • Integral representation
  • Options
  • Pricing
  • Two-color rainbow

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