A risk control tool for foreign financial activities – A new derivatives pricing model

I-Ming Jiang, Chia Chun Lo, Andreas Karathanasopoulos () and Konstantinos Skindilias
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I-Ming Jiang: Yuan Ze University
Chia Chun Lo: Prince Mohammad Bin Salman College (MBSC)
Andreas Karathanasopoulos: American University of Beirut
Konstantinos Skindilias: University of Greenwich

Journal of Asset Management, 2017, vol. 18, issue 4, No 3, 269-294

Abstract: Abstract Investors as well as firms are concerned with not only foreign/domestic stock price risk but also foreign exchange rate risk when making decisions for investing (or financing) overseas. In this paper, a new contingent claim is proposed for the derivatives markets for use in the domestic or foreign derivatives markets. Particularly, we address hedging against stock and exchange rate risk while adjusting for protecting the value of a collateralized stock. We introduce a closed-form solution for a Quanto put option coupled with a reset feature to hedge against downside risk while maintain upside potential from foreign investments. The Quanto options meet the investors’ concerns for exchange rate risk while the reset feature locks in value against downside stock risk. The proposed product is an efficient tool for risk management and aims to support decision making for firms when considering financing and investing in the foreign markets.

Keywords: Quanto options; reset options; exchange rate risk; market risk; decision making (search for similar items in EconPapers)
JEL-codes: D81 G11 G13 (search for similar items in EconPapers)
Date: 2017
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DOI: 10.1057/s41260-016-0023-6

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