Re: Specifics of Himalayan Option

Posted by Marcin Pawlik on
URL: http://quantlib.414.s1.nabble.com/Specifics-of-Himalayan-Option-tp5293p5294.html

2009/12/17 Andreas Spengler <[hidden email]>:

> regarding the description of the Himalayan Option,
>
> "The payoff of a Himalaya option is computed in the following way: Given a
> basket of N assets, and N time periods, at the end of each period the
> option who performed the best is added to the average and then discarded
> from the basket. At the end of the N, periods the option pays the max
> between the strike and the average of the best performers."
>
> I have some questions regarding that:
>
> - What exactly does "performed the best" mean? Relative to the starting
> value?
> Relative to the value at the end of the preceding period?

I think that relative to the starting value is a more common solution.


> - Is the relative performance or the absolute value at the fixing dates
> added to the running average?

Performance.


> - In conjunction with the above, would I have to specify an absolute
> strike or a relative strike (e.g. 104%)?

Relative one.

Take a look:
http://www.global-derivatives.com/index.php/pricing-models-topmenu-37/49?task=view
http://www.classiccmp.org/transputer/finengineer/%5BRisk%20Magazine,%20Overhaus%5D%20Himalaya%20Options.pdf

Marcin

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