Hi,

 

I'm trying to use monte carlo simulation to price a worst of three asset
currency option.  I'm trying to follow what Haug does in his book "The
Complete Guide to Option Pricing Formulas"  Unfortunately he only
carries the monte carlo  simulation logic out to an option on two assets
and I'm not able to infer how the underlying asset prices should be
modeled for an option with 3 underlying assets.  I know this might not
be the perfect forum for this question but it was the best I could think
of.  Any help you can provide would be greatly appreciated.  The formula
that Haug gives for simulating two correlated asset prices which follow
geometric Brownian motion is....

 

S1+ ChangeS1 = S1exp((u1-1/2*std1^2)*t + std1*a1*sqrt(t))

S2+ ChangeS2 = S2exp((u2-1/2*std2^2)*t + std2*a2*sqrt(t))

a1=e1

a2=rho12*e1+ e2*sqrt(1-rho^2)

where e1 and e2 are independent random numbers from standard normal
distributions

 

Again, Im basically just trying to add an S3 to this model so that
rho12, rho13, and rho23 are all incorporated. Thanks again for any
insight you can provide!

 

Ben

 

 


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