Pricing Multi-Asset Cross Currency Options

Kenichiro Shiraya and Akihiko Takahashi
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Kenichiro Shiraya: Graduate School of Economics, University of Tokyo, Tokyo
Akihiko Takahashi: Graduate School of Economics, University of Tokyo, Tokyo

No CARF-F-290, CARF F-Series from Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo

Abstract: This paper develops a general pricing method for multi-asset cross currency options, whose underlying asset consists of multiple different assets, and the evaluation currency is different from the ones used in the most liquid market of each asset; the examples include cross currency options, cross currency basket options and cross currency average options. We also demonstrate that our scheme is able to evaluate options with high dimensional state variables such as 200 dimensions, which is necessary for pricing basket options with 100 underlying assets under stochastic volatility environment. Moreover, in practice, fast calibration is necessary in the option markets relevant for the underlying assets and the currency, which is also achieved in this paper. Furthermore, we investigate the implied correlations in the cross currency markets on the dates before and after the events, Lehman Shock and Tohoku Earthquake.

Pages: 42 pages
Date: 2012-09
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Citations: View citations in EconPapers (14)

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Persistent link: https://EconPapers.repec.org/RePEc:cfi:fseres:cf290

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