TY - JOUR
T1 - Pricing Composite and Quanto Derivatives under Stochastic Correlation and Stochastic Volatility
JF - The Journal of Derivatives
SP - 82
LP - 102
DO - 10.3905/jod.2014.21.4.082
VL - 21
IS - 4
AU - Romo, Jacinto Marabel
Y1 - 2014/05/31
UR - http://jod.pm-research.com/content/21/4/82.abstract
N2 - There is growing trade in options whose payoffs are a function of multiple stochastic variables. One common type is an option on an asset denominated in one currency with a payoff in a different currency. Two closely related structures of this kind are quantos and composite options. Pricing formulas for European payoff contracts are available under Black–Scholes assumptions, but they require the assumption of constant volatility and correlations, neither of which is supported empirically. Romo develops a model of time-varying volatilities and correlations under a multiasset Wishart process, which is solved using Fourier and Laplace transform methods to produce semi-closed-form valuation equations. One structure especially exposed to stochastic correlation risk is a forward-starting quanto, which is easily priced in this framework.TOPICS: Options, risk management
ER -