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An Algorithm for Computing Values of Options on the Maximum or Minimum of Several Assets

Author

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  • Boyle, Phelim P.
  • Tse, Y. K.

Abstract

An approximate method is developed for computing the values of European options on the maximum or the minimum of several assets. The method is very fast and is accurate for parameter ranges that are often of the most interest. The approach casts the problem in terms of order statistics and can be used to handle situations where the initial asset prices, the asset variances, and the covariances are all unequal. Numerical values are given to illustrate the accuracy of the method.

Suggested Citation

  • Boyle, Phelim P. & Tse, Y. K., 1990. "An Algorithm for Computing Values of Options on the Maximum or Minimum of Several Assets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 25(2), pages 215-227, June.
    • Handle: RePEc:cup:jfinqa:v:25:y:1990:i:02:p:215-227_00
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    Cited by:

    1. Sanjay Mansabdar & Hussain C Yaganti, 2020. "Valuing the quality option in agricultural commodity futures: a Monte Carlo simulation based approach," Papers 2006.11222, arXiv.org.
    2. Rosella Castellano & Roy Cerqueti, 2010. "Roots and Effects of Investments' Misperception," Working Papers 62-2010, Macerata University, Department of Finance and Economic Sciences, revised Dec 2010.
    3. Boyle, Phelim P. & Lin, X. Sheldon, 1997. "Bounds on contingent claims based on several assets," Journal of Financial Economics, Elsevier, vol. 46(3), pages 383-400, December.
    4. Peter W. Duck & Chao Yang & David P. Newton & Martin Widdicks, 2009. "Singular Perturbation Techniques Applied To Multiasset Option Pricing," Mathematical Finance, Wiley Blackwell, vol. 19(3), pages 457-486, July.
    5. Tristan Guillaume, 2008. "Making the best of best-of," Review of Derivatives Research, Springer, vol. 11(1), pages 1-39, March.
    6. Alexander Melnikov & Yuliya Romanyuk, 2008. "Efficient Hedging And Pricing Of Equity-Linked Life Insurance Contracts On Several Risky Assets," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 11(03), pages 295-323.
    7. Rosenberg, Joshua V., 1998. "Pricing multivariate contingent claims using estimated risk-neutral density functions," Journal of International Money and Finance, Elsevier, vol. 17(2), pages 229-247, April.
    8. Lien, Donald & Tse, Yiu Kuen, 2006. "A survey on physical delivery versus cash settlement in futures contracts," International Review of Economics & Finance, Elsevier, vol. 15(1), pages 15-29.
    9. Martzoukos, Spiros H., 2001. "The option on n assets with exchange rate and exercise price risk," Journal of Multinational Financial Management, Elsevier, vol. 11(1), pages 1-15, February.
    10. Lars Stentoft, 2019. "Efficient Numerical Pricing of American Call Options Using Symmetry Arguments," JRFM, MDPI, vol. 12(2), pages 1-26, April.
    11. Nicola Secomandi & Mulan X. Wang, 2012. "A Computational Approach to the Real Option Management of Network Contracts for Natural Gas Pipeline Transport Capacity," Manufacturing & Service Operations Management, INFORMS, vol. 14(3), pages 441-454, July.
    12. Mozumder, Sharif & Dempsey, Michael & Kabir, M. Humayun & Choudhry, Taufiq, 2016. "An improved framework for approximating option prices with application to option portfolio hedging," Economic Modelling, Elsevier, vol. 59(C), pages 285-296.
    13. Rosella Castellano & Roy Cerqueti, 2013. "Roots and effects of financial misperception in a stochastic dominance framework," Quality & Quantity: International Journal of Methodology, Springer, vol. 47(6), pages 3371-3389, October.
    14. Xun Li & Zhenyu Wu, 2006. "A semi-analytic method for valuing high-dimensional options on the maximum and minimum of multiple assets," Annals of Finance, Springer, vol. 2(2), pages 179-205, March.
    15. Chen, Andrew H. & Kensinger, John W. & Conover, James A., 1998. "Valuing Flexible Manufacturing Facilities as Options," The Quarterly Review of Economics and Finance, Elsevier, vol. 38(3, Part 2), pages 651-674.

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