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by Jhammer
February 28th, 2014, 6:06 pm
Forum: Technical Forum
Topic: Pricing dual digital option
Replies: 14
Views: 7863

Pricing dual digital option

Interesting idea I'll try your suggestion and will post the results..
by Jhammer
February 28th, 2014, 1:58 pm
Forum: Technical Forum
Topic: Pricing dual digital option
Replies: 14
Views: 7863

Pricing dual digital option

On the same note, isn't correlation conserved when switching from one measure to another?
by Jhammer
February 28th, 2014, 1:36 pm
Forum: Technical Forum
Topic: Pricing dual digital option
Replies: 14
Views: 7863

Pricing dual digital option

<t>Thanks for you insight and comments, muaddibThe problem is that we don't have access to the price of dual digital options, and we need to come up with a technique to price them.My initial thought was to consider a joint log-normal model, and investigate the deviation from true price of dual digit...
by Jhammer
February 27th, 2014, 8:29 pm
Forum: Technical Forum
Topic: Pricing dual digital option
Replies: 14
Views: 7863

Pricing dual digital option

you are right. We can easily price the single digitals by using a bull spread (or bear spread) and the implied vol surface of each, and [$]\mathbf{1_A}[$] represents the terminal payoff (no barrier is considered).
by Jhammer
February 27th, 2014, 5:48 pm
Forum: Technical Forum
Topic: Pricing dual digital option
Replies: 14
Views: 7863

Pricing dual digital option

<t>By [$]\mathbf{1_A}[$] we mean an indicator function which is one when A is true (A can be defined as digital put or call)Step 3 is nothing but using the definition of covariance. Similarly, definition of correlation coefficient is used for step 4.Here is the proof for step 5:[$]\sigma^{2}_{\mathb...
by Jhammer
February 27th, 2014, 3:37 pm
Forum: Technical Forum
Topic: Pricing dual digital option
Replies: 14
Views: 7863

Pricing dual digital option

<t>Thanks for keeping this post alive, Alan!I have come up with an alternate solution. It seems naively simple. Here it is:1- Price the single digital options by considering the vol skew of each2- Define the dual digital as [$]\mathbf{1}_{A} \mathbf{1}_{B}[$] (we know [$]E\left[\mathbf{1}_{A}\right]...
by Jhammer
February 26th, 2014, 6:02 pm
Forum: Technical Forum
Topic: Pricing dual digital option
Replies: 14
Views: 7863

Pricing dual digital option

<t>Hi,I am working on pricing a double digital option. The underlyings are STOXX50 and EURUSD FXrate.We need to consider the vol skew of both underlying as well as the correlation between them. My original approach was pricing the individual digital options using a bull call spread, and then fit the...
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