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Valuing a compound exchange option by monte carlo method

• Kata Varadi
• Janos Szaz
• Patricia Becsky-Nagy

(2024). ECMS 2024, 38th Proceedings
Edited by: Daniel Grzonka, Natalia Rylko, Grazyna Suchacka, Vladimir Mityushev, European Council for Modelling and Simulation.
DOI: http://doi.org/10.7148/2024
ISSN: 2522-2422 (ONLINE)
ISSN: 2522-2414 (PRINT)
ISSN: 2522-2430 (CD-ROM)
ISBN: 978-3-937436-84-5
ISBN: 978-3-937436-83-8 (CD) Communications of the ECMS Volume 38, Issue 1, June 2024, Cracow, Poland June 4th – June 7th, 2024

https://doi.org/10.7148/2024-0098

Kata varadi, Janos szaz, Patricia becsky-nagy (2024). Valuing a Compound Exchange Option by Monte Carlo Method, ECMS 2024, Proceedings Edited by: Daniel Grzonka, Natalia Rylko, Grazyna Suchacka, Vladimir Mityushev, European Council for Modelling and Simulation. doi:10.7148/2024-0098

In this paper we show the valuation of a compound exchange option by Monte Carlo method, which option we named as ComEx option in our research. ComEx option is an option, which provides the right to its owner to exchange two options, in our paper specifically, two real options. Our aim is to show the intrinsic value of the ComEx option with different parameter settings. We use the Margrabe option as the benchmark option in the calculation, which option gives the right to its owner to exchange two underlying assets. These underlying assets in our calculations will be the underlying assets of the two real options of the ComEx option. Our result shows that the price evolution of the Margrabe-, and the ComEx options are very similar, just the scale is different. The option on exchanging the underlying assets most of the cases worth more than the option on exchanging the options, as it reduces risk. We also show the sensitivity of the option prices on the change of the correlation and volatility parameters.