Abstract
A pricing formula for exchange options on nontraded assets is discussed in this paper. In comparison with Margrabe (1978), our pricing formula contains two additional parameters which were the result from the introduction of the two tradable assets with relationship to the two nontraded underlying assets. In addition, the hedging strategy and value function of an agent whose portfolio contains two tradable assets and an exchange option on nontraded assets are derived.We conclude that for hedging purpose, the optimal position for one tradable asset needs to be modified downward, while that of the other needs to be modified in the opposite direction. And the amount of the modification depends on the relationship between the nontraded asset and its tradable counterpart.