A short cut to the rainbow

Per Horfelt designs an efficient and accurate method to price many popular multi-asset options such as options on the minimum and maximum of several assets and podiums. The method is based on a modification of the conditional independence model and is ideal for generating risk reports

Generating accurate risk reports can be both time-consuming and difficult. This is especially true for options that have to be priced with the Monte Carlo method since this is slow and typically leads to noisy Greeks. The aim of this article is to present an alternative to Monte Carlo that can price many popular equity rainbow options such as options on the minimum and maximum of several assets and podiums. The method is based on the conditional independence model and a probability matching