Black-Scholes Model’s application in rainbow option pricing

Abstract

In this paper, we use excel as a tool to explore the pricing of rainbow options and their advantages based on the Black-Scholes Model. Two-color rainbow options are mainly explored in the paper, in which the underlying stocks are Apple and ExxonMobil. Simulating the price of two stocks is performed through Excel. Return on the corresponding European options and rainbow options is obtained after that. Next, the differences between the return on rainbow options and European options and pricing on rainbow option are analyzed. Finally, sensitivity analysis is carried out to further explore rainbow option pricing.