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Pricing Exchange Rate Options and Quanto Caps in the Cross-Currency Random Field LIBOR Market Model

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  • Rajinda Wickrama

Abstract

We develop an arbitrage-free random field LIBOR market model to price cross-currency derivatives. The uncertainty of the forward LIBOR rates of our cross-currency model is driven by a two time parameter random field instead of a finite dimensional Brownian motion. To demonstrate the applications of this model, we develop an approximate closed-form pricing formula for Quanto caps and cross-currency swaps. Further, we derive an exact pricing formula for an exchange rate option in the random field setting.

Suggested Citation

  • Rajinda Wickrama, 2021. "Pricing Exchange Rate Options and Quanto Caps in the Cross-Currency Random Field LIBOR Market Model," Papers 2103.00323, arXiv.org, revised Mar 2021.
    • Handle: RePEc:arx:papers:2103.00323
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    References listed on IDEAS

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    4. David Heath & Robert Jarrow & Andrew Morton, 2008. "Bond Pricing And The Term Structure Of Interest Rates: A New Methodology For Contingent Claims Valuation," World Scientific Book Chapters, in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 13, pages 277-305, World Scientific Publishing Co. Pte. Ltd..
    5. Marek Rutkowski & Marek Musiela, 1997. "Continuous-time term structure models: Forward measure approach (*)," Finance and Stochastics, Springer, vol. 1(4), pages 261-291.
    6. Mikkelsen, Peter, 2001. "Cross-Currency LIBOR Market Models," Finance Working Papers 01-6, University of Aarhus, Aarhus School of Business, Department of Business Studies.
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