A Jump-Diffusion Approach for Pricing Exotic Multi-Asset Derivatives

21 Pages Posted: 20 Jun 2012 Last revised: 18 Jul 2012

Date Written: 2012

Abstract

We propose a simple multidimensional jump-diffusion process for pricing exotic derivatives with multiple underlyings. This process ensures the possibility of sudden drops in asset prices, fits several well-known empirical properties of asset returns, and incorporates dependencies between diffusions, jump intensities, and jump sizes. We show by pricing barrier reverse convertibles that neglecting jumps and dependencies can result in underestimation of the spreads associated with these investments. This feature is likely to have consecutive effects for studies on the overpricing of exotic multi-asset financial derivatives.

Keywords: Jump-Diffusion Model, Multi-Asset Derivatives, Exotic Derivatives

JEL Classification: C13, G13

Suggested Citation

Cserna, Balazs, A Jump-Diffusion Approach for Pricing Exotic Multi-Asset Derivatives (2012). Available at SSRN: https://ssrn.com/abstract=2088128 or http://dx.doi.org/10.2139/ssrn.2088128

Balazs Cserna (Contact Author)

University of Frankfurt ( email )

Gr├╝neburgplatz 1
Frankfurt am Main, 60323
Germany

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