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The Pricing of Quanto Options: An empirical copula approach

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  • Rafael Felipe Carmargo Prudencio
  • Christian D. Jakel

Abstract

The quanto option is a cross-currency derivative in which the pay-off is given in foreign currency and then converted to domestic currency, through a constant exchange rate, used for the conversion and determined at contract inception. Hence, the dependence relation between the option underlying asset price and the exchange rate plays an important role in quanto option pricing. In this work, we suggest to use empirical copulas to price quanto options. Numerical illustrations show that the flexibility provided by this approach, concerning the dependence relation of the two underlying stochastic processes, results in non-negligible pricing differences when contrasted to other models.

Suggested Citation

  • Rafael Felipe Carmargo Prudencio & Christian D. Jakel, 2020. "The Pricing of Quanto Options: An empirical copula approach," Papers 2005.02953, arXiv.org, revised Feb 2021.
    • Handle: RePEc:arx:papers:2005.02953
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