Advanced Search
MyIDEAS: Login to save this article or follow this journal

Pricing Quanto Equity Swaps in a Stochastic Interest Rate Economy

Contents:

Author Info

  • San-Lin Chung
  • Hsiao-Fen Yang
Registered author(s):

    Abstract

    This paper derives a pricing model for a quanto foreign equity/domestic floating rate swap in which one party pays domestic floating interest rates and receives foreign stock returns determined in the foreign currency, but is paid in the domestic currency. We use the risk-neutral valuation technique developed by Amin and Bodurtha to generate an arbitrage-free pricing model. A closed-form solution is obtained under further restrictions on the drift rates of the asset price processes. Pricing formulae show that the value of a quanto equity swap at the start date does not depend on the foreign stock price level, but rather on the term structures of both countries and other parameters. However, the foreign stock price levels do affect the swap value times between two payment dates. The numerical implementations indicate that the domestic and foreign term structures, the correlation between the foreign interest rate and the exchange rate, and the correlation between the exchange rate and the foreign stock are more important factors in pricing a quanto equity swap than other correlations.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://www.tandfonline.com/doi/abs/10.1080/1350486042000297261
    Download Restriction: Access to full text is restricted to subscribers.

    As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

    Bibliographic Info

    Article provided by Taylor & Francis Journals in its journal Applied Mathematical Finance.

    Volume (Year): 12 (2005)
    Issue (Month): 2 ()
    Pages: 121-146

    as in new window
    Handle: RePEc:taf:apmtfi:v:12:y:2005:i:2:p:121-146

    Contact details of provider:
    Web page: http://www.tandfonline.com/RAMF20

    Order Information:
    Web: http://www.tandfonline.com/pricing/journal/RAMF20

    Related research

    Keywords: Equity swaps; term structure of interest rates; risk-neutral valuation; arbitrage-free pricing model;

    References

    No references listed on IDEAS
    You can help add them by filling out this form.

    Citations

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:taf:apmtfi:v:12:y:2005:i:2:p:121-146. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Michael McNulty).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.