medium · Quantitative Finance derivatives
A trader is pricing an exchange option to receive Asset 1 (S_1 = 60, σ_1 = 0.25) in exchange for Asset 2 (S_2 = 55, σ_2 = 0.20) in T = 1 year, with a correlation ρ = 0.50.
Using the Margrabe formula, what is the 'spread volatility' hatσ required for the calculation?
- 0.3202
- 0.4500
- 0.2291
- 0.1500
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