Fourier Inversion Formulas for Multiple-Asset Option Pricing
43 Pages Posted: 9 Aug 2010 Last revised: 22 Feb 2015
Date Written: February 21, 2015
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.
Keywords: Derivatives pricing, multiple triggers payoff, Fourier-Stieltjes transform
JEL Classification: G12
Suggested Citation: Suggested Citation