Quanto option pricing in the parsimonious Heston model

  • In this work we use the Parsimonious Multi–Asset Heston model recently developed in [Dimitroff et al., 2009] at Fraunhofer ITWM, Department Financial Mathematics, Kaiserslautern (Germany) and apply it to Quanto options. We give a summary of the model and its calibration scheme. A suitable transformation of the Quanto option payoff is explained and used to price Quantos within the new framework. Simulated prices are given and compared to market prices and Black–Scholes prices. We find that the new approach underprices the chosen options, but gives better results than the Black–Scholes approach, which is prevailing in the literature on Quanto options.

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Author:G. Dimitroff, A. Szimayer, A. Wagner
Serie (Series number):Berichte des Fraunhofer-Instituts für Techno- und Wirtschaftsmathematik (ITWM Report) (174)
Document Type:Report
Language of publication:English
Year of Completion:2009
Year of Publication:2009
Publishing Institute:Fraunhofer-Institut für Techno- und Wirtschaftsmathematik
Date of the Publication (Server):2009/11/30
GND-Keyword:Parsimonious Heston Model; Quanto option; Black–Scholes approach
Faculties / Organisational entities:Fraunhofer (ITWM)
DDC-Cassification:5 Naturwissenschaften und Mathematik / 510 Mathematik
Licence (German):Standard gemäß KLUEDO-Leitlinien vor dem 27.05.2011