Quanto Option Pricing in the Parsimonious Heston Model
14 Pages Posted: 24 Sep 2009 Last revised: 2 Oct 2009
Date Written: September 23, 2009
In this work we use the Parsimonious Multi–Asset Heston model recently developed in [Dimitroff et al., 2009] at Fraunhofer ITWM, Department Financial Mathematics, Kaiserslautern (Germany) and apply it to Quanto options. We give a summary of the model and its calibration scheme. A suitable transformation of the Quanto option payoff is explained and used to price Quantos within the new framework. Simulated prices are given and compared to market prices and Black–Scholes prices. We find that the new approach underprices the chosen options, but gives better results than the Black–Scholes approach, which is prevailing in the literature on Quanto options.
Keywords: Quanto option, option pricing, Heston model, Parsimonious Heston Model
JEL Classification: G13
Suggested Citation: Suggested Citation