QUANTO INTEREST-RATE EXCHANGE OPTIONS IN A CROSS-CURRENCY LIBOR MARKET MODEL
Journal Title: Asian Economic and Financial Review - Year 2015, Vol 5, Issue 5
Abstract
The purpose of this paper is to price quanto interest-rate exchange options (QIREOs) based on a practical and easy-to-use interest-rate model. According to the payoff structure of QIREOs, the cross-currency LIBOR market model (CLMM), in which the initial LIBOR market model (LMM) is extended from a single-currency economy to a cross-currency economy, is suitable to be adopted to price four different types of quanto interest-rate exchange options in this article. Our pricing formulae represent the general formulae in the framework of the CLMM. Hedging strategies are also provided for practical implementation.
Authors and Affiliations
Tsung-Yu Hsieh*| Department of Banking and Finance, Tamkang Universit, New Taipei City, Taiwan (R.O.C.), Chi-Hsun Chou| Department of Management, Fo Guang University, Linwei Rd., Jiaosi , Yilan County, Taiwan (R.O.C.), Son-Nan Chen| Shanghai Advanced Institute of Finance, Shanghai Jiao Tong University Datong Plaza, West Huaihai Road, Shanghai P.R.China
Keywords
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