Option Pricing Using Copula Functions

The proposed research primarily aims to apply copula functions for pricing American-type rainbow options (also the minor target is to adapt proposed numerical methods to vanilla options valuation). Such an issue is highly relevant since existing methods of pricing contingent claims on multiple assets are challenged by the properties of empirical data which violate limiting assumptions of these models, especially in questions of interdependence of assets, what adds an extra bias for model prices of American type contracts. Proposed numerical algorithms benefit from known advantages of multivariate modeling via copulas, combining it with the proposed, adapted for American-type contracts pricing issues, extension of Rosenberg and Engle (2002) pricing kernel and numerical approach of Longstaff and Schwarz (2001). The major target is successfully achieved: the proposed methods is tested on empirical data in pricing multivariate call-on-max option on GAZR and SBRF futures. Moreover, the univariate analogue of the methodology has proved its relevance, forecasting vanilla options’ prices quite better than stochastic volatility model comparing with real exchange deals prices at MOEX.