Margrabe's Option Price

Posted by Chun-Yuan Chiu

Initial price of the 1st underlying asset
Initial price of the 2nd underlying asset
Annulized volatility of the 1st underlying
Annulized volatility of the 2nd underlying
Dividend yield of the 1st underlying
Dividend yield of the 2nd underlying
Correlation coefficient
Time to maturity Years
Option value


Derivation of Margrabe's Formula

The price of the option to exchange S2 for S1 at time T, which means the payoff is max(S1(T) - S2(T), 0). S1(t) and S2(t) are the prices of two risky assets modeled by log-normal diffusion processes. The computation is based on Margrabe's formula.

Tagged: Margrabe's formula, Multi-assets options, Foreign exchange, FX

 •  May 30, 2014  • 

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