Rainbow Option The Nonparametric Pricing Research

Options market is one of the world's most active and rapidly growing markets, a lot new options have been generated with the demand of profits and hedging. In addition to conventional options, in recent years, there have been many complex derivative securities changed, combinated and derived from the conventional options, referred to as exotic options. Exotic Options is one of the world's most viable financial products, at all times its connotation and extension have been changing and expanding. Exotic Options by the number of underlying assets can be divided into single-asset and multi-asset options. Common multi-asset options include rainbow options, a basket options and spread options, their common feature is the option's value depends on several uncertain underlying asset..The main aim of this paper is to study the rainbow option pricing model based on Copula functions by using the ideas of Breeden and Litenberger (1978). This model is simple and easy to understand, which have solved the problems of the underlying asset return must obey the normal distribution in the traditional Black-Scholes model and complex multi-dimensional asset option pricing. In the simulation analysis, according to the ideas of Breeden and Litenberger (1978), we use kernel density method to gain the risk-neutral marginal distributions of the euro-dollar and dollar-yen exchange option, and select the optimal Copula function to connect marginal distribution function, further structure joint risk-neutral distribution function. The results show that t-Copula function can fits the data better than the Archimedean Copula function and Gaussian Copula function, which improve the accuracy of option pricing; then I take Matlab to simulations the price of the nonparameter pricing model of European rainbow option based on Copula function, further compare with the traditional Black-Scholes model. It has practical significance to theoretical analysis and empirical studies of multi-asset options.