Quanto Option Pricing in the Parsimonious Heston Model

14 Pages Posted: 24 Sep 2009 Last revised: 2 Oct 2009

See all articles by Georgi Dimitroff

Georgi Dimitroff

Independent

Alexander Szimayer

University of Hamburg - Faculty of Economics and Business Administration

Andreas Wagner

Karlsruhe University of Applied Sciences

Date Written: September 23, 2009

Abstract

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

Dimitroff, Georgi and Szimayer, Alexander and Wagner, Andreas, Quanto Option Pricing in the Parsimonious Heston Model (September 23, 2009). Available at SSRN: https://ssrn.com/abstract=1477387 or http://dx.doi.org/10.2139/ssrn.1477387

Georgi Dimitroff

Independent ( email )

Alexander Szimayer

University of Hamburg - Faculty of Economics and Business Administration ( email )

Von-Melle-Park 5
Hamburg, 20146
Germany

Andreas Wagner (Contact Author)

Karlsruhe University of Applied Sciences ( email )

Karlsruhe
Germany

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