ForeignEquityBS function

ForeignEquity option valuation via Black-Scholes (BS) model

ForeignEquity Option via Black-Scholes (BS) model

ForeignEquityBS(o = OptPx(Opt(Style = "ForeignEquity")), I1 = 1540,
  I2 = 1/90, sigma1 = 0.14, sigma2 = 0.18, g1 = 0.02, rho = -0.3,
  Type = c("Foreign", "Domestic"))

Arguments

• o: An object of class OptPx
• I1: A spot price of the underlying security 1 (usually I1)
• I2: A spot price of the underlying security 2 (usually I2)
• sigma1: a vector of implied volatilities for the associated security 1
• sigma2: a vector of implied volatilities for the associated security 2
• g1: is the payout rate of the first stock
• rho: is the correlation between asset 1 and asset 2
• Type: ForeignEquity option type: 'Foreign' or 'Domestic'

Returns

A list of class ForeignEquityBS consisting of the original OptPx object and the option pricing parameters I1,I2, Type, isForeign, and isDomestic

as well as the computed price PxBS.

Details

Two types of ForeignEquity options are priced: 'Foreign' and 'Domestic'. See "Exotic Options", 2nd, Peter G. Zhang for more details.

Examples

o = OptPx(Opt(Style = 'ForeignEquity', Right = "Put"), r= 0.03)
ForeignEquityBS(o, I1=1540, I2=1/90, g1=.02, sigma1=.14,sigma2=0.18, rho=.03,Type='Foreign')

o = OptPx(Opt(Style = 'ForeignEquity',  Right = "Put", ttm=9/12, K=1600), r=.03)
ForeignEquityBS(o, I1=1540, I2=1/90, g1=.02, sigma1=.14,sigma2=0.18, rho=0.03,Type='Foreign')

o = OptPx(Opt(Style = 'ForeignEquity', Right = "C", ttm=9/12, K=1600), r=.03)
ForeignEquityBS(o, I1=1540, I2=1/90, g1=.02, sigma1=.14,sigma2=0.18, rho=0.03,Type='Foreign')

o = OptPx(Opt(Style = 'ForeignEquity', Right = "C", ttm=9/12, K=1600), r=.03)
ForeignEquityBS(o, I1=1540, I2=1/90, g1=.02, sigma1=.14,sigma2=0.18, rho=0.03,Type='Domestic')

o = OptPx(Opt(Style = 'ForeignEquity', Right = "P", ttm=9/12, K=1600), r=.03)
ForeignEquityBS(o, I1=1540, I2=1/90, g1=.02, sigma1=.14,sigma2=0.18, rho=0.03,Type='Domestic')

Author(s)

Chengwei Ge, Department of Statistics, Rice University, 2015

References

Zhang, Peter G. Exotic Options, 2nd, 1998.