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Question on option pricing

bcheema

Joined
9/8/10
Messages
34
Points
18
Hi all,

I have been asked this question and not sure about how to reply

Consider a simple portfolio consisting of 3 stocks , S1,S2,S3, which follow lognormal volatility v1,v2,v3. S1 and S2 are correlated with 'p' while S3 is not correlated. Please compute the value of a European call which has terminal payoff as

Max(S1,S2,S3)


I will really appreciate your help here.

Thanks again!
 
u can do MC or googl rainbow options for tons of refern. for max(s1,s2) is spot+margrabe. for three u can measure payoff in units of independent stock(change of numeraire), than ur payoff is bestof two assets and cash. pretty sure there is formula for that. u can check Haug.
 
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