Questions tagged [margrabes-formula]

Margrabe's formula prices an option to exchange one risky asset for another risky asset (an exchange option).

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Changing numeraire in Margrabes formula

Consider a Black Scholes market with constant coefficients, a bond and two risky assets: $$dB_{t}=r B_{t}dt \\ dS_{t}^{i}=S_{t}^{i}(b_{i}dt+\sigma_{i,1}dW_{t}^{1}+\sigma_{i,2}dW_{t}^{2})$$ where $i=1,...
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Margrabe option: change of numeraire versus conditioning and numerical integration

I am having a slight brain meltdown because I do not seem to be able to understand the following basic thing. Consider a BS economy, and two assets $X$ and $Y$ $$ dX = \sigma X dW $$ $$ dY = \nu Y dZ ...
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Who trades exchange options in practice (Margrabe's formula)?

I'm currently studying the pricing of the exchange option. https://en.wikipedia.org/wiki/Margrabe%27s_formula While I can appreciate the theory, who actually buys these options in practice? Are ...
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Why risk-free interest is needed for Margrabe's Formula?

The source code for Margarble's formula in QuantLib is here. The implementation requires a forward price be computed: ...
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Value of an option to exchange an asset for another

I'm working out the examples in the paper "Changes of Numeraire, Changes of Probability Measure and Option Pricing", corollary 3. An option of exchanging asset 2 against asset 1 at time T, its time-0 ...