Fair Rainbow Option Price via Modified Marshall-Olkin Copula

Nikolai Kolev (IME-USP)

Abstract: We obtain a fair rainbow option price of two underlying stocks traded on NY Stock Exchange. We implement Monte Carlo simulations and compare the prices using various copulas (Gaussian, Student’s t, Clayton and Gumbel) to model error terms for a given payoff function. We got very satisfactory results showing that the best option price prediction has been achieved via modified Marshall-Olkin copula, recently introduced by us. The reason lies on a complementary skew parameter reflecting the usual asymmetry between stocks (Joint work with Jayme Pinto).