Pricing Quanto and Composite Contracts with Local-Correlation Models

Andrea Pallavicini

Papers from arXiv.org

Abstract: Pricing composite and quanto contracts requires a joint model of both the underlying asset and the exchange rate. In this contribution, we explore the potential of local-correlation models to address the challenges of calibrating synthetic quanto forward contracts and composite options quoted in the market. Specifically, we design on-line calibration procedures for generic local and stochastic volatility models. The paper concludes with a numerical study assessing the calibration performance of these methodologies and comparing them to simpler approximations of the correlation structure.

Date: 2025-01
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