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Multi-factor model

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Multi-factor model
Any model in which there are two or more uncertain parameters in the Option price (one-factor models incorporate only one cause of uncertainty: the Future price). Multi-factor models are useful for two main reasons. Firstly, they permit more realistic modelling, particularly of Interest rates, although they are very difficult to compute. Secondly, multi-factor options (for example, spread options) have several parameters, each with independent volatilities, and also the Correlation between the underlyings must be dealt with separately.
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