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2

The best way to understand is to go back to one-period binomial option pricing. This is also discussed in Shreve's: "Stochastic Calculus for Finance 1" book. There's a nice article on one-period binomial option pricing here. You will need to understand: Although there are infinity ways to assign a one-period probability, there is an unique solution to the ...


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No offense but it will be much more complicated than what you think... I'm not even sure that you are familiar with risk-neutral pricing in the first place? I'll try to give you some clues. This security is called a basket option. On top of the multi-asset feature, there are non-trivial mechanisms embedded in the contract you mention: an auto-callable ...



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