Margrabe Exchange Option
Computes the price of an exchange option with the Margrabe formula: the right to exchange one asset for another at expiry. It's the generalization of Black-Scholes to two risky assets, where the strike stops being fixed and becomes the price of a second asset. The relevant volatility is that of the ratio between the two, combining the individual volatilities and the correlation. It shows up in mergers, spread options and executive compensation. Enter the two prices, the two volatilities, the correlation and the term.
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Margrabe Exchange Option
Computes the price of an exchange option with the Margrabe formula: the right to exchange one asset for another at expiry. It's the generalization of Black-Scholes to two risky assets, where the strike stops being fixed and becomes the price of a second asset. The relevant volatility is that of the ratio between the two, combining the individual volatilities and the correlation. It shows up in mergers, spread options and executive compensation. Enter the two prices, the two volatilities, the correlation and the term.
Swap one asset for another, with no fixed strike
Most options have a cash strike: you trade cash for the asset. The Margrabe exchange option is different and more general, because the strike is another asset. You get the right to deliver asset 2 and receive asset 1, exercising whenever the first is worth more than the second at expiry.
William Margrabe's insight, in 1978, was that what matters isn't the two volatilities in isolation but the volatility of the ratio between the assets, combining both with the correlation. The more correlated, the less the ratio swings and the cheaper the option. The formula is a disguised Black-Scholes, with that combined volatility in place of the single volatility.
Enter the two asset prices, their volatilities, the correlation between them and the term. The tool returns the exchange option premium. It shows up in real situations like stock-for-stock acquisition offers, spread options between commodities and compensation plans that compare the performance of two assets.
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The results provided by this tool are for general informational and educational purposes only and do not constitute professional, financial, medical, legal, tax or accounting advice. Always confirm important decisions with a qualified professional and official sources.