Pricing Quanto and Composite Contracts with Local-Correlation Models

2025/01/13 by Pallavicini, Andrea
#65C05 #91G20 #91G60 #Computational Finance (q-fin.CP) #FOS: Economics and business #Pricing of Securities (q-fin.PR)

paper · doi:10.48550/arxiv.2501.07200

Abstract

Pricing composite and quanto contracts requires a joint model of both the underlying asset and the exchange rate. In this contribution, we explore the potential of local-correlation models to address the challenges of calibrating synthetic quanto forward contracts and composite options quoted in the market. Specifically, we design on-line calibration procedures for generic local and stochastic volatility models. The paper concludes with a numerical study assessing the calibration performance of these methodologies and comparing them to simpler approximations of the correlation structure.

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