Valuation of quanto options in a Markovian regime-switching market: A Markov-modulated Gaussian HJM model

Son-Nan Chen, Mi-Hsiu Chiang, Pao-Peng Hsu and Chang-Yi Li

Finance Research Letters, 2014, vol. 11, issue 2, 161-172

Abstract: We consider the valuation of European quanto call options in an incomplete market where the domestic and foreign forward interest rates are allowed to exhibit regime shifts under the Heath–Jarrow–Morton (HJM) framework, and the foreign price dynamics is exogenously driven by a regime switching jump-diffusion model with Markov-modulated Poisson processes. We derive closed-form solutions for four different types of quanto call options, which include: options struck in a foreign currency, a foreign equity call struck in domestic currency, a foreign equity call option with a guaranteed exchange rate, and an equity-linked foreign exchange-rate call.

Keywords: HJM; Markov chain; Esscher transform; Quanto options (search for similar items in EconPapers)
JEL-codes: C02 E43 G13 G15 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:11:y:2014:i:2:p:161-172

DOI: 10.1016/j.frl.2013.09.002

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