Project Description and Background Rainbow options are options written on multiple assets. Well known examples are basket options, "Best of" options, "Worst of" options, etc. The objective is to study methods for hedging such options with options on single underlyings. More concretely, one chooses a data generating process for the multiple assets (e.g multivariate geometric Brownian motion) and a distance measure (e.g variance at maturity). For a given rainbow option and a given set of simulated paths, the idea is to find the portfolio of single assets options (hedge portfolio) which minimizes the distance between the rainbow option and the hedge portfolio. What is involved The project will concentrate on one type of rainbow option and a couple of distance measures and data generating processes. Skills Needed Willigness to learn the MATLAB programming language. Monte Carlo techniques, stochastic optimization. Reading http://www.hec.unil.ch/cms_mbf/master_thesis/0318.pdf RUSTEM & HOWE, Algorithms for Worst-Case Design and Applications to Risk management, Princeton University Press (2002)