Abstract

ZAMBRANO REYES, Adriana  and  VENEGAS MARTINEZ, Francisco. Pricing rainbow options on baskets of assets under mixed diffusion-jump processes. Contad. Adm [online]. 2016, vol.61, n.2, pp.374-390. ISSN 0186-1042.  https://doi.org/10.1016/j.cya.2015.11.007.

This paper studies the pricing of options on the maximum or minimum (price or return) of two risky assets, known as rainbow options. It extends the valuation of these contracts to the case where assets are driven by diffusions combined with jumps. The parameters of the jump process are stochastic, specifically the jump size follows a Normal distribution, making it necessary to resort to Lévy processes. A numerical methodology is developed with MATLAB to provided the price of a basket sale option, and put on the maximum and the minimum of two risky assets; the results can be extended to the case of n assets.

Keywords : Rainbow options; Partial integro-differential equation; Mixed diffusion-jumps processs; Lévy processes.

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