Fourier Inversion Formulas for Multiple-Asset Option Pricing

43 Pages Posted: 9 Aug 2010 Last revised: 22 Feb 2015

Bruno Feunou

Bank of Canada

Ernest Tafolong

Desjardins Group

Date Written: February 21, 2015

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.

Keywords: Derivatives pricing, multiple triggers payoff, Fourier-Stieltjes transform

JEL Classification: G12

Suggested Citation

Feunou, Bruno and Tafolong, Ernest, Fourier Inversion Formulas for Multiple-Asset Option Pricing (February 21, 2015). Studies in Nonlinear Dynamics and Econometrics, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1655429 or http://dx.doi.org/10.2139/ssrn.1655429

Bruno Feunou (Contact Author)

Bank of Canada ( email )

234 Wellington Street
Ottawa, Ontario K1A 0G9
Canada
613-782-8302 (Phone)

HOME PAGE: http://kamkui.net/

Ernest Tafolong

Desjardins Group ( email )

200, avenue des Commandeurs
Levis, Québec G6V 6R2
Canada

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