An Analytically Tractable Model for Pricing Multiasset Options with Correlated Jump-Diffusion Equity Processes and a Two-Factor Stochastic Yield Curve

Abstract EN

This paper shows how to value multiasset options analytically in a modeling framework that combines both continuous and discontinuous variations in the underlying equity or foreign exchange processes and a stochastic, two-factor yield curve.

All correlations are taken into account, between the factors driving the yield curve, between fixed income and equity as asset classes, and between the individual equity assets themselves.

The valuation method is applied to three of the most popular two-asset options.