Quanto Pricing beyond Black–Scholes

• Main Authors: Holger Fink, Stefan Mittnik
• Format: Article
• Language: English
• Published: MDPI AG 2021-03-01
• Series: Journal of Risk and Financial Management
• Subjects: normal tempered stable process; Lévy process; quanto options; Nikkei 225; calibration; parameter stability
• Online Access: https://www.mdpi.com/1911-8074/14/3/136

Since their introduction, quanto options have steadily gained popularity. Matching Black–Scholes-type pricing models and, more recently, a fat-tailed, normal tempered stable variant have been established. The objective here is to empirically assess the adequacy of quanto-option pricing models. The validation of quanto-pricing models has been a challenge so far, due to the lack of comprehensive data records of exchange-traded quanto transactions. To overcome this, we make use of exchange-traded structured products. After deriving prices for composite options in the existing modeling framework, we propose a new calibration procedure, carry out extensive analyses of parameter stability and assess the goodness of fit for plain vanilla and exotic double-barrier options.