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Himalayan option
Hi all, I got a question about Himalayan option with global floor: max(average return, 0). The inituition is that the higher the correlation between your underlyings, the higher the price. This is true only if the underlyings have the same drift.. I tried it with different drifts for each underlying and I actually got a lower price. (ie a 0.75 corr has a higher price than a 0.99 corr).. I can't think of the intution.. Anyone has any insight??Thanks a lot!- chichi
Last edited by chichi on May 25th, 2006, 10:00 pm, edited 1 time in total.
Himalayan option
I do agree with your intuition, let's say you take only two stocks and two different correlations : -1 and +1 :if correl = -1 then avg return=0 and price = 0if correl = +1 then avg return = either -r or +r and price =r/2 roughly...There must be something wrong with your simulation then i believe...
Himalayan option
Like I got it for same drift.. higher correlation -> higher price.. but only if I have different drift for each underlying.. then I don't have it any more.. (I understand at the end of the day, I'm putting in riskfree for the drift.. but just curious...
Himalayan option
Does anyone know how to hedge this product by the way? (Or any paper regarding hedging for mountain range product?Thanks!
Himalayan option
Does anyone know how many stocks are typically involved in a Himalayan Option ?
Himalayan option
I'm interested in the number of stocks involved in the contract because if there isn't too many ( say less than 10 ) then I can see a way of making the pay off continuous without causing any computational problems. A continous pay off may be of interest to someone trying to hedge the Himalayan ?