# maxassetbystulz

Determine European rainbow option price on maximum of two risky assets using Stulz option pricing model

## Description

computes option prices using the Stulz option pricing model.`Price`

= maxassetbystulz(`RateSpec`

,`StockSpec1`

,`StockSpec2`

,`Settle`

,`Maturity`

,`OptSpec`

,`Strike`

,`Corr`

)

## Examples

### Compute Rainbow Option Prices Using the Stulz Option Pricing Model

Consider a European rainbow option that gives the holder the right to buy either $100,000 worth of an equity index at a strike price of 1000 (asset 1) or $100,000 of a government bond (asset 2) with a strike price of 100% of face value, whichever is worth more at the end of 12 months. On January 15, 2008, the equity index is trading at 950, pays a dividend of 2% annually and has a return volatility of 22%. Also on January 15, 2008, the government bond is trading at 98, pays a coupon yield of 6%, and has a return volatility of 15%. The risk-free rate is 5%. Using this data, if the correlation between the rates of return is -0.5, 0, and 0.5, calculate the price of the European rainbow option.

Since the asset prices in this example are in different units, it is necessary to work in either index points (asset 1) or in dollars (asset 2). The European rainbow option allows the holder to buy the following: 100 units of the equity index at $1000 each (for a total of $100,000) or 1000 units of the government bonds at $100 each (for a total of $100,000). To convert the bond price (asset 2) to index units (asset 1), you must make the following adjustments:

Multiply the strike price and current price of the government bond by 10 (1000/100).

Multiply the option price by 100, considering that there are 100 equity index units in the option.

Once these adjustments are introduced, the strike price is the same for both assets ($1000). First, create the `RateSpec`

:

Settle = 'Jan-15-2008'; Maturity = 'Jan-15-2009'; Rates = 0.05; Basis = 1; RateSpec = intenvset('ValuationDate', Settle, 'StartDates', Settle,... 'EndDates', Maturity, 'Rates', Rates, 'Compounding', -1, 'Basis', Basis)

`RateSpec = `*struct with fields:*
FinObj: 'RateSpec'
Compounding: -1
Disc: 0.9512
Rates: 0.0500
EndTimes: 1
StartTimes: 0
EndDates: 733788
StartDates: 733422
ValuationDate: 733422
Basis: 1
EndMonthRule: 1

Create the two `StockSpec`

definitions.

AssetPrice1 = 950; % Asset 1 => Equity index AssetPrice2 = 980; % Asset 2 => Government bond Sigma1 = 0.22; Sigma2 = 0.15; Div1 = 0.02; Div2 = 0.06; StockSpec1 = stockspec(Sigma1, AssetPrice1, 'continuous', Div1)

`StockSpec1 = `*struct with fields:*
FinObj: 'StockSpec'
Sigma: 0.2200
AssetPrice: 950
DividendType: {'continuous'}
DividendAmounts: 0.0200
ExDividendDates: []

`StockSpec2 = stockspec(Sigma2, AssetPrice2, 'continuous', Div2)`

`StockSpec2 = `*struct with fields:*
FinObj: 'StockSpec'
Sigma: 0.1500
AssetPrice: 980
DividendType: {'continuous'}
DividendAmounts: 0.0600
ExDividendDates: []

Calculate the price of the options for different correlation levels.

Strike = 1000 ; Corr = [-0.5; 0; 0.5]; OptSpec = 'call'; Price = maxassetbystulz(RateSpec, StockSpec1, StockSpec2,... Settle, Maturity, OptSpec, Strike, Corr)

`Price = `*3×1*
111.6683
103.7715
92.4412

These are the prices of one unit. This means that the premium is 11166.83, 10377.15, and 9244.12 (for 100 units).

## Input Arguments

`RateSpec`

— Annualized, continuously compounded rate term structure

structure

Annualized, continuously compounded rate term structure, specified using
`intenvset`

.

**Data Types: **`structure`

`StockSpec1`

— Stock specification for asset 1

structure

Stock specification for asset 1, specified using `stockspec`

.

**Data Types: **`structure`

`StockSpec2`

— Stock specification for asset 2

structure

Stock specification for asset 2, specified using `stockspec`

.

**Data Types: **`structure`

`Settle`

— Settlement or trade dates

vector

Settlement or trade dates, specified as an
`NINST`

-by-`1`

vector of numeric
dates.

**Data Types: **`double`

`Maturity`

— Maturity dates

vector

Maturity dates, specified as an
`NINST`

-by-`1`

vector.

**Data Types: **`double`

`OptSpec`

— Option type

cell array of character vectors with a value of `'call'`

or `'put'`

Option type, specified as an
`NINST`

-by-`1`

cell array of character
vectors with a value of `'call'`

or
`'put'`

.

**Data Types: **`cell`

`Strike`

— Strike prices

vector

Strike prices, specified as an
`NINST`

-by-`1`

vector.

**Data Types: **`double`

`Corr`

— Correlation between the underlying asset prices

vector

Correlation between the underlying asset prices, specified as an
`NINST`

-by-`1`

vector.

**Data Types: **`double`

## Output Arguments

`Price`

— Expected option prices

vector

Expected option prices, returned as an
`NINST`

-by-`1`

vector.

## More About

### Rainbow Option

A *rainbow option* payoff depends on the
relative price performance of two or more assets.

A rainbow option gives the holder the right to buy or sell the best or worst of two securities, or options that pay the best or worst of two assets. Rainbow options are popular because of the lower premium cost of the structure relative to the purchase of two separate options. The lower cost reflects the fact that the payoff is generally lower than the payoff of the two separate options.

Financial Instruments Toolbox™ supports two types of rainbow options:

Minimum of two assets — The option holder has the right to buy(sell) one of two risky assets, whichever one is worth less.

Maximum of two assets — The option holder has the right to buy(sell) one of two risky assets, whichever one is worth more.

For more information, see Rainbow Option.

## Version History

**Introduced in R2009a**

## Open Example

You have a modified version of this example. Do you want to open this example with your edits?

## MATLAB Command

You clicked a link that corresponds to this MATLAB command:

Run the command by entering it in the MATLAB Command Window. Web browsers do not support MATLAB commands.

# Select a Web Site

Choose a web site to get translated content where available and see local events and offers. Based on your location, we recommend that you select: .

You can also select a web site from the following list:

## How to Get Best Site Performance

Select the China site (in Chinese or English) for best site performance. Other MathWorks country sites are not optimized for visits from your location.

### Americas

- América Latina (Español)
- Canada (English)
- United States (English)

### Europe

- Belgium (English)
- Denmark (English)
- Deutschland (Deutsch)
- España (Español)
- Finland (English)
- France (Français)
- Ireland (English)
- Italia (Italiano)
- Luxembourg (English)

- Netherlands (English)
- Norway (English)
- Österreich (Deutsch)
- Portugal (English)
- Sweden (English)
- Switzerland
- United Kingdom (English)