A Reliability Model For Option Theory
This paper proposes and explores an extension of the usual h-out-of-n systems, where the components of the system are assumed to play di®erent roles in determining its failure. The theoretical reliability framework is actually adopted for the development of a barrier basket options model. In particular, an option is presented as a coherent system whose components are the assets of the basket. The reliability function of the option { which gives insights on its risk pro¯le { is evaluated by the computation of the signature of the system. Some intuitive ¯nancial results serve as illustrations of the theoretical framework.
Area: Other
Keywords: h-out-of-n system, reliability, coherent system, signature, barrier basket option
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