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Exchange-One-Asset-For-Another Options

European

where

and where

c = European call price

S1 = Spot of asset one

S2 = Spot of asset two

b1 = Cost of carry asset one

b2 = Cost of carry asset two

Q1 = Quantity of asset one

Q2 = Quantity of asset two

T = Time till maturity

= Volatility asset one

= Volatility asset two

= Correlation between the two assets

N = The cumulative normal distribution function

American

Bjerksund and Stensland (1993) showed that an American Exchange one asset for another option (S2 for S1 can be priced using a formula for pricing a plain vanilla American option, with the underlying asset S1 with a risk-adjusted drift equal to b1-b2, the strike price equal to S2 , time to maturity T, risk free rate equal to r-b2, and volatility equal to (defined in the same way as it is for the European option).

 

See Also

oX_Exchange( ) Function

oX_Exchange_Imp( ) Function

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