Exotic Options – Exchange Assets Option

File Name: Exotic Options – Exchange Assets

Location: Modeling Toolkit | Exotic Options | Exchange Assets

Brief Description: Values the asset exchange option, where the holder has the ability to swap one asset with another

Requirements: Modeling Toolkit

Modeling Toolkit Functions Used: MTAssetExchangeAmericanOption, MTAssetExchangeEuropeanOption

The Exchange of Assets Option provides the option holder the right at expiration (European version) to swap and give Asset 2 away and, in return, receive Asset 1, with predetermined quantities of the first and second assets (Figure 47.1). The American option allows the swap to occur at any time before as well as up to and including maturity. Clearly, the more negative the correlation between the assets, the larger the risk reduction and diversification effects and hence the higher the value of the option. Sometimes in a real options world, where the assets swapped are not financial instruments but real physical assets, this option is called a switching option. We discuss switching options in later chapters when dealing with real options applications.

Figure 47.1: Exchange assets options

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