Crypto Quanto and Inverse Options in a Black-Scholes World

37 Pages Posted: 28 Jul 2021 Last revised: 6 Nov 2022

See all articles by Carol Alexander

Carol Alexander

University of Sussex Business School; Peking University HSBC Business School

Ding Chen

University of Sussex Business School

Arben Imeraj

University of Sussex

Date Written: July 26, 2021

Abstract

Over 90% of exchange trading on crypto options has always been on the Deribit platform. This centralised crypto exchange only lists inverse products because they do not accept fiat currency. Currently, fiat-based traders can only make deposits in bitcoin, although they can withdraw both bitcoin and ether to their on-chain wallets. Likewise, other major crypto options platforms only list crypto-stablecoin trading pairs in so-called direct options, which are similar to the standard crypto options listed by the CME except the U.S. dollar is replaced by a stablecoin version. Until now a clear mathematical exposition of these products has been lacking. We discuss the sources of market incompleteness in direct and inverse options and compare their pricing and hedging characteristics. Then we discuss the useful applications of currency protected “quanto” direct and inverse options for fiat-based traders and describe their pricing and hedging characteristics, all in the Black-Scholes setting.

Keywords: Inverse option, cryptocurrency, foreign exchange, hedging, incomplete market

JEL Classification: C02, G12, G23

Suggested Citation

Alexander, Carol and Chen, Ding and Imeraj, Arben, Crypto Quanto and Inverse Options in a Black-Scholes World (July 26, 2021). Available at SSRN: https://ssrn.com/abstract=3893037 or http://dx.doi.org/10.2139/ssrn.3893037

Carol Alexander (Contact Author)

University of Sussex Business School ( email )

Falmer, Brighton BN1 9SL
United Kingdom

HOME PAGE: http://www.coalexander.com

Peking University HSBC Business School ( email )

Ding Chen

University of Sussex Business School ( email )

214 Jubilee Building
University of Sussex
Brighton, Brighton BN1 9SL
United Kingdom

Arben Imeraj

University of Sussex ( email )

Sussex House
Falmer
Brighton, Sussex BNI 9RH
United Kingdom

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
459
Abstract Views
1,471
Rank
96,614
PlumX Metrics