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- Risk Profile
Risk Profile
The payoff of an Altiplano option is determined by two competing terms:
- the option term
- the barrier term
For ease of analysis, we look at a homogeneous ptf with identical pairwise correlations given by a single number in the simple lognormal model with no coupon payout.
For a simple call option on a basket, high correlation and high volatility increases its price.
For the barrier event, it depends on the type. If it takes only one asset to hit a barrier, then low correlation and high volatility increase the probability of hitting it.
Moreover, depending on the barrier, the paths that lead to higher option prices may make the barrier even more or less likely, leading to possible nonmonotonous behavior.
So even in this simple homogeneous case with a single correlation, the behavior is rather complex.