Multiple Compound Option Price
Posted by Chun-Yuan Chiu
This calculator gives the price of a multiple compound option (a call on call on call on call.) The calculation is based on the FFT method, which is capable of pricing n-fold compound options for arbitrary n, but in most cases in practice n=4 is enough. The algorithm is a sequence of operations on grid functions. We take uniform grid in the interval [-c, c]. For now the number of grid points can only be a power of 2.The 4th strike price is the compound option's strike price at maturity date T. The 3rd strike price is the strike of the underlying call option at time t=3T/4, the 2nd one is the strike of the underlying call on call at t=2T/4, and the 1st one, the strike of the underlying call on call on call at t=T/4. Setting the first and the third strike prices to 0, this multiple compound option reduces to a call on a call. Setting the first three strike prices to 0, it reduces to a vanilla call option.
Tagged: FFT, Compound Option
• Mar 19, 2013 •
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