# Dual digital option correlation

Some simple options can be transformed into more complex instruments if the underlying risk model that the option reflected does not match a future reality. In particular, derivatives in the currency and mortgage markets have been subject to liquidity risk that was not reflected in the pricing of the option when sold. Rainbow options refer to all options whose payoff depends on more than one underlying risky asset; each asset is referred to as a color of the rainbow.

Examples of these include: Rainbow options are usually priced using an appropriate industry-standard model such as Black—Scholes for each individual basket component, and a matrix of correlation coefficients applied to the underlying stochastic drivers for the various models. While there are some closed-form solutions for simpler cases e. For bibliography see Lyden From Wikipedia, the free encyclopedia. Bond and money markets: University of California at Berkeley, Options, futures, and other derivatives.

Energy derivative Freight derivative Inflation derivative Property derivative Weather derivative. Retrieved from " https: Options finance Economics and finance stubs. Views Read Edit View history. For example, a call option could be written on a basket of ten healthcare stocks, where the basket was composed of ten stocks in weighted proportions.

Basket options are usually priced using an appropriate industry-standard model such as Black—Scholes for each individual basket component, and a matrix of correlation coefficients applied to the underlying stochastic drivers for the various models. While there are some closed-form solutions for simpler cases e. Problems in hedging basket options can be of some significance when dealing with markets that exhibit a strong skew. Many operators price basket options as if the underlying basket were a single commodity following its own stochastic process with its volatility derived from its own time series.

This however conflicts with a fact that an average or any linear combination of assets with lognormal distribution does not follow lognormal distribution. From Wikipedia, the free encyclopedia. Retrieved 14 December Bond and money markets: University of California at Berkeley,