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Exchange option valuation using Liu process

Author

Listed:
  • Seema Uday Purohit

    (Department of Mathematics, Kirti M. Doongursee College of Arts, Science and Commerce, DES Mumbai Campus, Kashinath Dhuru Road, Off Veer Savarkar Road, Dadar West, Mumbai 400028, Maharashtra, India)

  • Prasad Narahar Lalit

    (Department of Humanities and Science, Fr. Conceicao Rodrigues College of Engineering, Fr. Agnel Ashram, Bandstand, Bandra West, Mumbai 400050, Maharashtra, India3Research and Development Centre, Bharathiar University, Coimbatore, India4Fr. Conceicao Rodrigues College of Engineering, University of Mumbai, Mumbai, Maharashtra, India)

Abstract

Margrabe formula is an extension of the famous Black–Scholes model extended to two correlated stocks. In the stochastic financial mathematics approach, the difficulty of addressing this valuation lies in the fact that the difference between two log-normal distributions is not log-normal. We avoided this approach in this work and valued the European type exchange option using the Liu process, a Brownian motion’s fuzzy counterpart. The work compares the proposed model values with the simulated values obtained by the Margrabe formula.

Suggested Citation

  • Seema Uday Purohit & Prasad Narahar Lalit, 2022. "Exchange option valuation using Liu process," International Journal of Financial Engineering (IJFE), World Scientific Publishing Co. Pte. Ltd., vol. 9(02), pages 1-9, June.
    • Handle: RePEc:wsi:ijfexx:v:09:y:2022:i:02:n:s2424786321500183
    DOI: 10.1142/S2424786321500183
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