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Currency-Translated Foreign Equity Options With Path Dependent Features And Their Multi-Asset Extensions

Author

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  • YUE-KUEN KWOK

    (Department of Mathematics, Hong Kong University of Science & Technology, Clear Water Bay, Hong Kong, China)

  • HOI-YING WONG

    (Department of Mathematics, Hong Kong University of Science & Technology, Clear Water Bay, Hong Kong, China)

Abstract

Currency-translated foreign equity options (quanto options) are designed for investors who would like to manage different types of risk in international equity investments. The terminal payoffs of quanto options depend on the price of a foreign currency denominated asset (or stock index) and the exchange rate in different combinations of choices. This paper presents a systematic framework to derive pricing formulas for different European-style quanto options with path-dependent payoff functions. The path dependent features can be the barrier feature associated with the underlying asset price movement, the averaging feature of the exchange rate over the life of the option, etc. In many cases, the pricing formulas for quanto options can be inferred from their vanilla counterparts by applying the quanto-prewashing technique of making modifications on the risk neutralized drift rates and volatility rates. The extension of the pricing formulations to multi-asset extremum options with the quanto feature is also considered. The pricing behaviors of the joint quanto options and the Asian quanto options are examined.

Suggested Citation

  • Yue-Kuen Kwok & Hoi-Ying Wong, 2000. "Currency-Translated Foreign Equity Options With Path Dependent Features And Their Multi-Asset Extensions," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 3(02), pages 257-278.
    • Handle: RePEc:wsi:ijtafx:v:03:y:2000:i:02:n:s0219024900000127
    DOI: 10.1142/S0219024900000127
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    Citations

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    Cited by:

    1. Ma, Yong & Pan, Dongtao & Shrestha, Keshab & Xu, Weidong, 2020. "Pricing and hedging foreign equity options under Hawkes jump–diffusion processes," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 537(C).
    2. Xu, Weidong & Wu, Chongfeng & Li, Hongyi, 2011. "Accounting for the impact of higher order moments in foreign equity option pricing model," Economic Modelling, Elsevier, vol. 28(4), pages 1726-1729, July.
    3. Zhang, Wei-Guo & Li, Zhe & Liu, Yong-Jun, 2018. "Analytical pricing of geometric Asian power options on an underlying driven by a mixed fractional Brownian motion," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 490(C), pages 402-418.
    4. Sun, Qi & Xu, Weidong, 2015. "Pricing foreign equity option with stochastic volatility," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 437(C), pages 89-100.
    5. Ulyah, Siti Maghfirotul & Lin, Xenos Chang-Shuo & Miao, Daniel Wei-Chung, 2018. "Pricing short-dated foreign equity options with a bivariate jump-diffusion model with correlated fat-tailed jumps," Finance Research Letters, Elsevier, vol. 24(C), pages 113-128.
    6. Xu, Weidong & Wu, Chongfeng & Li, Hongyi, 2011. "Foreign equity option pricing under stochastic volatility model with double jumps," Economic Modelling, Elsevier, vol. 28(4), pages 1857-1863, July.
    7. Fan, Kun & Shen, Yang & Siu, Tak Kuen & Wang, Rongming, 2014. "Pricing foreign equity options with regime-switching," Economic Modelling, Elsevier, vol. 37(C), pages 296-305.
    8. Li, Zhe & Zhang, Wei-Guo & Liu, Yong-Jun, 2018. "European quanto option pricing in presence of liquidity risk," The North American Journal of Economics and Finance, Elsevier, vol. 45(C), pages 230-244.
    9. Hoi Ying Wong & Ying Lok Cheung, 2004. "Geometric Asian options: valuation and calibration with stochastic volatility," Quantitative Finance, Taylor & Francis Journals, vol. 4(3), pages 301-314.
    10. Ewald, Christian-Oliver & Menkens, Olaf & Hung Marten Ting, Sai, 2013. "Asian and Australian options: A common perspective," Journal of Economic Dynamics and Control, Elsevier, vol. 37(5), pages 1001-1018.

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