The numerical simulation of Quanto option prices using Bayesian statistical methods

Lisha Lin, Yaqiong Li, Rui Gao and Jianhong Wu

Physica A: Statistical Mechanics and its Applications, 2021, vol. 567, issue C

Abstract: In the paper, the pricing of Quanto options is studied, where the underlying foreign asset and the exchange rate are correlated with each other. We first adopt Bayesian methods to estimate unknown parameters entering the pricing formula of Quanto options, including the volatility of underlying foreign asset, the volatility of exchange rate and the correlation between them. Then we compute and predict prices of different four types of Quanto options by using Bayesian posterior prediction techniques and Monte Carlo methods in combination. Finally, we provide numerical simulations implemented by Markov Chain Monte Carlo methods to demonstrate the advantage of Bayesian method used in this paper comparing with some other existing methods. This paper is a new application of Bayesian methods in the pricing of multi-asset options.

Keywords: Quanto option; Foreign asset; Exchange rate; Correlation; Bayesian statistical inference; Markov Chain Monte Carlo (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:567:y:2021:i:c:s0378437120309274

DOI: 10.1016/j.physa.2020.125629

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