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Pricing geometric Asian rainbow options under fractional Brownian motion

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  • Wang, Lu
  • Zhang, Rong
  • Yang, Lin
  • Su, Yang
  • Ma, Feng

Abstract

In this paper, we explore the pricing of the assets of Asian rainbow options under the condition that the assets have self-similar and long-range dependence characteristics. Based on the principle of no arbitrage, stochastic differential equation, and partial differential equation, we obtain the pricing formula for two-asset rainbow options under fractional Brownian motion. Next, our Monte Carlo simulation experiments show that the derived pricing formula is accurate and effective. Finally, our sensitivity analysis of the influence of important parameters, such as the risk-free rate, Hurst exponent, and correlation coefficient, on the prices of Asian rainbow options further illustrate the rationality of our pricing model.

Suggested Citation

  • Wang, Lu & Zhang, Rong & Yang, Lin & Su, Yang & Ma, Feng, 2018. "Pricing geometric Asian rainbow options under fractional Brownian motion," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 494(C), pages 8-16.
    • Handle: RePEc:eee:phsmap:v:494:y:2018:i:c:p:8-16
    DOI: 10.1016/j.physa.2017.11.055
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    References listed on IDEAS

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