Pricing options on the maximum of two average prices under stochastic volatility models

ABSTRACT

In this paper, we work under a stochastic volatility model to value options on the maximum of two average prices. In the proposed framework, explicit pricing formulae of options on the maximum of two average prices are obtained. Finally, we perform numerical examples to illustrate the prices of options on the maximum of two average prices and those of options on the maximum of two underlying asset prices.

KEYWORDS:

• Options on the maximum
• rainbow options
• stochastic volatility models
• stochastic correlation

JEL CLASSIFICATION:

• G13

Acknowledgments

The author would like to thank the anonymous referee and the editor for their helpful comments and valuable suggestions that led to several important improvements. All errors are my own responsibility.

Disclosure statement

No potential conflict of interest was reported by the author.

Additional information

Funding

This study was supported by the National Natural Science Foundation of China [No. 11701084].