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Fourier Inversion Formulas for Multiple-Asset Option Pricing

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  • Bruno Feunou
  • Ernest Tafolong

Abstract

Plain vanilla options have a single underlying asset and a single condition on the payoff at the expiration date. For this class of options, a well-known result of Duffie, Pan and Singleton (2000) shows how to invert the characteristic function to obtain a closed-form formula for their prices. However, multiple-asset and multiple-condition derivatives such as rainbow options cannot be priced within this framework. Utilizing inversion of the Fourier transform - and resorting to neither the Black-Scholes framework nor the affine models settings - the authors provide an analytical solution for options whose payoffs depend on two or more conditions. Numerical experiments based on the multiple-asset and multiple-condition derivatives are provided to illustrate the usefulness of the proposed approach.

Suggested Citation

  • Bruno Feunou & Ernest Tafolong, 2015. "Fourier Inversion Formulas for Multiple-Asset Option Pricing," Staff Working Papers 15-11, Bank of Canada.
    • Handle: RePEc:bca:bocawp:15-11
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    References listed on IDEAS

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    Cited by:

    1. Feunou Bruno & Tafolong Ernest, 2015. "Fourier inversion formulas for multiple-asset option pricing," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 19(5), pages 531-559, December.
    2. Escobar-Anel, Marcos & Rastegari, Javad & Stentoft, Lars, 2020. "Affine multivariate GARCH models," Journal of Banking & Finance, Elsevier, vol. 118(C).
    3. Orzechowski Arkadiusz, 2018. "Pricing Correlation Options: from the P. Carr And D. Madan Approach to the New Method Based on the Fourier Transform," Economics and Business Review, Sciendo, vol. 4(1), pages 16-28, April.

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    More about this item

    Keywords

    Asset Pricing;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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