Deep Learning Application in Rainbow Options Pricing

Subject Areas : Financial Mathematics

Ali Bolfake ¹ ( Department of Mathematics, Faculty of Sciences, Arak University, Arak 38156-8-8349, Iran )
Seyed Nourollah Mousavi ² ( Department of Mathematics, Faculty of Sciences, Arak University, Arak 38156-8-8349, Iran )
Sima Mashayekhi ³ ( Department of Mathematics, Faculty of Sciences, Arak University, Arak 38156-8-8349, Iran )

Received: 2022-10-18 Accepted : 2023-01-16 Published : 2023-07-01

Keywords: Monte-Carlo simulation, descent gradient method, deep learning, European options, Asian options,

Abstract :

Due to the rapid advancements in computer technology, researchers are attracted to solving challenging problems in many different fields. The price of rainbow options is an interesting problem in financial fields and risk management. When there is no closed-form solution to some options, numerical methods must be used. Choosing a suitable numerical method involves the most appropriate combination of criteria for speed, accuracy, simplicity and generality. Monte Carlo simulation methods and traditional numerical methods have expensive repetitive computations and unrealistic assumptions on the model. Deep learning provides an effective and efficient method for options pricing. In this paper, the closed-form formula or Monte-Carlo simulation are used to generate data in European and Asian rainbow option prices for the deep learning model. The results confirm that the deep learning model can price the rainbow options more accurately with less computation time than Monte-Carlo simulation.

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