Proceedings of the International Conference on Financial Innovation, FinTech and Information Technology, FFIT 2022, October 28-30, 2022, Shenzhen, China

Research Article

Spread and Rainbow Option Pricing Based on ARIMA

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  • @INPROCEEDINGS{10.4108/eai.28-10-2022.2328410,
        author={Tianyi  Xia},
        title={Spread and Rainbow Option Pricing Based on ARIMA},
        proceedings={Proceedings of the International Conference on Financial Innovation, FinTech and Information Technology, FFIT 2022, October 28-30, 2022, Shenzhen, China},
        publisher={EAI},
        proceedings_a={FFIT},
        year={2023},
        month={4},
        keywords={spread option; rainbow option; arima model; b-s formula; monte carlo simulation; nasdaq index; dow jones index},
        doi={10.4108/eai.28-10-2022.2328410}
    }
    
  • Tianyi Xia
    Year: 2023
    Spread and Rainbow Option Pricing Based on ARIMA
    FFIT
    EAI
    DOI: 10.4108/eai.28-10-2022.2328410
Tianyi Xia1,*
  • 1: School of Statistics University of international business and economics Beijing
*Contact email: 201957014@uibe.edu.cn

Abstract

Under the regional turbulence, the overall financial market environment is not optimistic. Financial assets are facing risk of decline, especially the index assets which reflect the market direction. Constructing multi-assets option portfolio is an efficient way of risk management and gain profit. This article focuses on the Black-Scholes-Merton(B-S-M) option pricing method of rainbow option and spread option and fits the ARIMA price prediction model. The data for one year is collected as the training set for ARIMA model and the historical volatility estimation. The B-S-M model takes historical and future forecast data into consideration, and find a good estimation for parameters. The Monte Carlo method is utilized for option pricing which contains the measure transform form risk-neutral measure to reality measure. ARIMA models fit subseries well with overall residuals evaluated as normal and the significant model parameters. According to the analysis, investors can forecast the market trend accurately and find the best portfolio. These results offer a guideline for the portfolio design with large net price gap in futures market. In addition, it also provides a way of the risk management under the high volatility condition and region instability nowadays.