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The numerical simulation of Quanto option prices using Bayesian statistical methods

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  • Lin, Lisha
  • Li, Yaqiong
  • Gao, Rui
  • Wu, Jianhong

Abstract

In the paper, the pricing of Quanto options is studied, where the underlying foreign asset and the exchange rate are correlated with each other. We first adopt Bayesian methods to estimate unknown parameters entering the pricing formula of Quanto options, including the volatility of underlying foreign asset, the volatility of exchange rate and the correlation between them. Then we compute and predict prices of different four types of Quanto options by using Bayesian posterior prediction techniques and Monte Carlo methods in combination. Finally, we provide numerical simulations implemented by Markov Chain Monte Carlo methods to demonstrate the advantage of Bayesian method used in this paper comparing with some other existing methods. This paper is a new application of Bayesian methods in the pricing of multi-asset options.

Suggested Citation

  • Lin, Lisha & Li, Yaqiong & Gao, Rui & Wu, Jianhong, 2021. "The numerical simulation of Quanto option prices using Bayesian statistical methods," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 567(C).
    • Handle: RePEc:eee:phsmap:v:567:y:2021:i:c:s0378437120309274
    DOI: 10.1016/j.physa.2020.125629
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    References listed on IDEAS

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