On the optimal choice of strike conventions in exchange option pricing (1807.05396v1)

Abstract: An important but rarely-addressed option pricing question is how to choose appropriate strikes for implied volatility inputs when pricing more exotic multi-asset derivatives. By means of Malliavin Calculus we construct an optimal log-linear strikevconvention for exchange options under stochastic volatility models. This novel approach allows us to minimize the difference between the corresponding Margrabe computed price and the true option price. We show that this optimal convention does not depend on the specific stochastic volatility model chosen. Numerical examples are given which provide strong support to the new methodology.