EXCHANGE ASSET OPTION

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Graphical Representation of Option Price

This is an option allows the holder to exchange one asest for another.
It is also known as Spread Option.
For example, an option to buy British pounds with Swiss francs, from the point of view of a U.S. investor,
an option to exchange one foreign currency asset for another foreign currency asset.
Another way to look at it is to give up an asset worth S1 and receive in return an asset worth S2.
The payoff is max(0,S2-S1).

We can use the Option to Exchange to obtain the better or worse of two assets.
It can be regarded as a position in one of the assets combined with an option to exchange it for the other asset, min(S1,S2)=S2-max(S2-S1,0) and max(S1,S2)=S2+max(S2-S1,0).

Pricing Models Page Available is a Swing Java Jar File if you just wish to run the models.


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