Pricing two dimensional derivatives under stochastic correlation

Abstract

In this paper we provide a closed-form approximation as well as a measure of the error for the price of several twodimensional derivatives under the assumptions of stochastic correlation and constant volatility. The method is applied to the pricing of Spread Options and Quantos Options, while three models for the stochatsic correlation are considered.

A Note on the Pricing of Basket Options Using Taylor Approximations

“…T / ỸT √ T Z (1) in law, where Z (1) is independent of Y T and it has, conditionally on ỸT , a standard univariate normal distribution. Moreover it is well known, see for example Tong (1989), that µ Y (1)…”

Pricing Basket Options by Polynomial Approximations

“…In the case of European spread options, whose payoffs are given in terms of the spread of both prices at maturity, several approximations have been considered in the works of [2,[5][6][7][8][9][10], among others, where different ad hoc approaches are studied.…”

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“…In the seminal paper of Heston, see [9], the pricing of option contracts under stochastic volatility is studied. The idea is extended to stochastic correlation in [1], while still considering constant volatilities. As an alternative view to correlation, models for the covariance process have been proposed.…”