It's Your Choice: A Unified Approach to Chooser Options
University of Bonn - The Bonn Graduate School of Economics
Deloitte & Touche - Financial Risk Solutions
February 1, 2010
International Journal of Theoretical and Applied Finance (IJTAF), 2010
We propose a unified framework for the pricing and hedging of chooser options on lognormal assets. This includes e.g. exchange or inflation rates under stochastic interest rates or equities under stochastic interest rates and dividend yields. This extends and includes chooser options under deterministic interest rates by a multidimensional model of an international economy with correlated stochastic processes. In this framework we derive closed form solutions of the arbitrage price for different specifications of chooser options. Also different hedge strategies are derived and their properties compared.
Keywords: Option pricing and hedging, interest rate risk, exchange rate risk, change of numeraireAccepted Paper Series
Date posted: June 8, 2010 ; Last revised: June 9, 2010
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