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rmeenaks
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Joined: May 1st, 2006, 2:31 pm

Pricing Options with a formula-based strike price

October 21st, 2006, 8:16 pm

Hi,We are in the process of creating a new? class of options that have a formula as the strike price of an option. The strike price can be very simple like:strike price = 5.0;or it could end up as a basked of multiple indices like so:strike price = INDEX1 + INDEX2 + 50% of INDEX3 + $20.00How would you price an option like this? What about the volatility & correlation? How do you handle that? Thanks,Ram
 
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Athletico
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Joined: January 7th, 2002, 4:17 pm

Pricing Options with a formula-based strike price

October 22nd, 2006, 4:09 pm

QuoteOriginally posted by: rmeenaksHi,We are in the process of creating a new? class of options that have a formula as the strike price of an option. The strike price can be very simple like:strike price = 5.0;or it could end up as a basked of multiple indices like so:strike price = INDEX1 + INDEX2 + 50% of INDEX3 + $20.00How would you price an option like this? What about the volatility & correlation? How do you handle that? Thanks,Ram Sounds like an outperformance option - Derman has an excellent paper on this: Outperformance Options
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