Hi All,
I'm trying to understand what this would mean for the measure being used. If the calculations are being done in the risk neutral measure then shouldn’t all of the discounting should be at the risk free rate to avoid arbitrage. If you use the risk neutral measure to forward price the stock but don't use the risk free rate for discounting in the Black formula then what measure is the calculation effectively being done under ?
Cheers
Ed
From: Paul Giltinan [mailto:[hidden email]]
Sent: 07 December 2016 14:34
To: [hidden email]
Subject: [Quantlib-users] AnalyticEuropeanEngine and Multi-Curve Discounting
Hi,
I am using AnalyticEuropeanEngine to price vanilla equity options, but wish to use separate curves for discounting and estimation of the equity forward price. The existing AnalyticEuropeanEngine only takes a GeneralisedBlackScholesProcess as input, and hence only has access to a “risk free rate curve” and a “dividend yield curve”. This is sufficient to match quoted forward prices, but is not flexible enough to enable pricing with reference to a separate discount curve.
I therefore propose extending AnalyticEuropeanEngine to take an optional second input argument for a discount curve (Handle<YieldTermStructure>). If this is not provided the engine defaults to the existing behaviour, but if it is provided the engine will use this curve when discounting cash flows.
Please take a look at the attached for a proposed implementation. It’s quite straightforward. If people are happy with this change then maybe I can submit a pull request?
Kind regards,
Paul
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