OPT_2_ASSET_CORRELATION

OPT_2_ASSET_CORRELATION theoretical price of options on 2 assets with correlation rho

Synopsis

OPT_2_ASSET_CORRELATION(call_put_flag,spot1,spot2,strike1,strike2,time,cost_of_carry1,cost_of_carry2,rate,volatility1,volatility2,rho)

Arguments

call_put_flag: 'c' for a call and 'p' for a put

spot1: spot price of the underlying asset of the first option

spot2: spot price of the underlying asset of the second option

strike1: strike prices of the first option

strike2: strike prices of the second option

time: time to maturity in years

cost_of_carry1: net cost of holding the underlying asset of the first option (for common stocks, the risk free rate less the dividend yield)

cost_of_carry2: net cost of holding the underlying asset of the second option (for common stocks, the risk free rate less the dividend yield)

rate: annualized risk-free interest rate

volatility1: annualized volatility in price of the underlying asset of the first option

volatility2: annualized volatility in price of the underlying asset of the second option

rho: correlation between the two underlying assets

Description

OPT_2_ASSET_CORRELATION models the theoretical price of options on 2 assets with correlation rho. The payoff for a call is max(spot2 - strike2,0) if spot1 > strike1 or 0 otherwise. The payoff for a put is max (strike2 - spot2, 0) if spot1 < strike1 or 0 otherwise.