Multi-asset option pricing based on stochastic optimal control assuming correlations lie in given intervals

The assumption of constant correlation between the underlyings cannot be satisfied in market. In this paper, we find the multi-asset option price intervals assuming the correlation lies within a given interval. First we transform this financial problem to a stochastic optimal control problem, then o...

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Bibliographic Details
Published in2017 29th Chinese Control And Decision Conference (CCDC) pp. 7343 - 7346
Main Author Yulin Du
Format Conference Proceeding
LanguageEnglish
Published IEEE 01.05.2017
Subjects
Black-Scholes-Barenblatt Equations
Correlation
Correlation Interval
Dynamic programming
Mathematical model
Multi-Asset Option Pricing
Optimal control
Pricing
Silicon
Stochastic Optimal Control
Stochastic processes
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Summary:The assumption of constant correlation between the underlyings cannot be satisfied in market. In this paper, we find the multi-asset option price intervals assuming the correlation lies within a given interval. First we transform this financial problem to a stochastic optimal control problem, then obtain options' maximum and minimum price models through dynamic programming principle. We further discuss how to solve the Black-Scholes-Barenblatt equation through finite difference schemes. We conclude this paper by giving its applications in multi asset option market, comparing with the analytical solutions, and giving a method how to identify arbitrage opportunity in multi-asset option markets.
ISSN:1948-9447
DOI:10.1109/CCDC.2017.7978512