Pricing Multi-Asset Cross Currency Optionss
AbstractThis paper develops a general pricing method for multi-asset cross currency options, whose underlying asset consists of multiple different assets, and the evaluation currency is different from the ones used in the most liquid market of each asset; the examples include cross currency options, cross currency basket options and cross currency average options. We also demonstrate that our scheme is able to evaluate options with high dimensional state variables such as 200 dimensions, which is necessary for pricing basket options with 100 underlying assets under stochastic volatility environment. Moreover, in practice, fast calibration is necessary in the option markets relevant for the underlying assets and the currency, which is also achieved in this paper. Furthermore, we investigate the implied correlations in the cross currency markets on the dates before and after the events, Lehman Shock and Tohoku Earthquake .
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Bibliographic InfoPaper provided by CIRJE, Faculty of Economics, University of Tokyo in its series CIRJE F-Series with number CIRJE-F-844.
Length: 42 pages
Date of creation: Mar 2012
Date of revision:
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This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-03-28 (All new papers)
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