2024/11/25 by Boris Ter-Avanesov, Ter-Avanesov, Boris, Günter Meißner +1
Economics, Econometrics and Finance · #Computational Finance (q-fin.CP) #FOS: Economics and business #Mathematical Finance (q-fin.MF) #Pricing of Securities (q-fin.PR) #Stochastic processes and financial applications
paper · pdf · doi:10.48550/arxiv.2411.16617
openalex publication_date 2024/11/25 · openalex created_date 2025/10/10 · openalex updated_date 2026/07/28
Quanto options allow the buyer to exchange the foreign currency payoff into the domestic currency at a fixed exchange rate. We investigate quanto options with multiple underlying assets valued in different foreign currencies each with a different strike price in the payoff function. We carry out a comparative performance analysis of different stochastic volatility (SV), stochastic correlation (SC), and stochastic exchange rate (SER) models to determine the best combination of these models for Monte Carlo (MC) simulation pricing. In addition, we test the performance of all model variants with constant correlation as a benchmark. We find that a combination of GARCH-Jump SV, Weibull SC, and Ornstein Uhlenbeck (OU) SER performs best. In addition, we analyze different discretization schemes and their results. In our simulations, the Milstein scheme yields the best balance between execution times and lower standard deviations of price estimates. Furthermore, we find that incorporating mean reversion into stochastic correlation and stochastic FX rate modeling is beneficial for MC simulation pricing. We improve the accuracy of our simulations by implementing antithetic variates variance reduction. Finally, we derive the correlation risk parameters Cora and Gora in our framework so that correlation hedging of quanto options can be performed.