Posted: 6 Nov 2013 Last revised: 30 Apr 2015
Date Written: April 15, 2015
The paper builds a framework for quanto adjustment in a situation when the currency under consideration is soft. The setting is different from the standard case of a hard currency due to the presence of default risk for the reference entity. This requires the effects of correlation between the default intensity and the exchange rate and a jump of the exchange rate at the time of default to be specially considered. We do this with change of measure techniques as well as under a general forward setting. This gives clarity of the exposition and cleaner pricing and hedging formulas. It allows also making a suitable decomposition of the effects that arise.
Keywords: exchange rate, quanto adjustment, change of measure, forward rate, quanto CDS, convexity adjustment
JEL Classification: G13
Suggested Citation: Suggested Citation
Yordanov, Vilimir, Soft Currency Quanto Adjustment (Part VII) (April 15, 2015). Available at SSRN: https://ssrn.com/abstract=2349759