On the exercise of American quanto options

Anna Battauz, Marzia De Donno and Alessandro Sbuelz

The North American Journal of Economics and Finance, 2022, vol. 62, issue C

Abstract: American option pricing is an important and engaging area of financial economics, particularly so in the presence of negative interest rates. Quanto options offer major international hedging/investment opportunities. We provide a comprehensive description of the optimal exercise policies associated with American quanto options. We show that a non-standard exercise policy characterized by a double continuation region may be optimal in the presence of non-positive domestic interest rates. We study empirical examples of finite-maturity American quanto options for which a double continuation region surrounding a non-empty early exercise region exists even if the infinite-maturity early exercise region is empty and the value of the infinite-maturity option is unbounded. Under the assumptions underpinning such empirical examples, we carefully characterize the existence, the monotonicity properties and the close-to-maturity behaviour of the upper and lower critical prices.

Keywords: Quanto options; American options; Valuation; Optimal exercise; Negative interest rates; FX markets (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:62:y:2022:i:c:s1062940822000870

DOI: 10.1016/j.najef.2022.101738

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