IDEAS home Printed from https://ideas.repec.org/a/eee/ecofin/v62y2022ics1062940822000870.html
   My bibliography  Save this article

On the exercise of American quanto options

Author

Listed:
  • Battauz, Anna
  • De Donno, Marzia
  • Sbuelz, Alessandro

Abstract

American option pricing is an important and engaging area of financial economics, particularly so in the presence of negative interest rates. Quanto options offer major international hedging/investment opportunities. We provide a comprehensive description of the optimal exercise policies associated with American quanto options. We show that a non-standard exercise policy characterized by a double continuation region may be optimal in the presence of non-positive domestic interest rates. We study empirical examples of finite-maturity American quanto options for which a double continuation region surrounding a non-empty early exercise region exists even if the infinite-maturity early exercise region is empty and the value of the infinite-maturity option is unbounded. Under the assumptions underpinning such empirical examples, we carefully characterize the existence, the monotonicity properties and the close-to-maturity behaviour of the upper and lower critical prices.

Suggested Citation

  • Battauz, Anna & De Donno, Marzia & Sbuelz, Alessandro, 2022. "On the exercise of American quanto options," The North American Journal of Economics and Finance, Elsevier, vol. 62(C).
    • Handle: RePEc:eee:ecofin:v:62:y:2022:i:c:s1062940822000870
    DOI: 10.1016/j.najef.2022.101738
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1062940822000870
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.najef.2022.101738?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Lee, Hangsuck & Ha, Hongjun & Lee, Minha, 2021. "Valuation of piecewise linear barrier options," The North American Journal of Economics and Finance, Elsevier, vol. 58(C).
    2. Anna Battauz & Marzia De Donno & Alessandro Sbuelz, 2015. "Real Options and American Derivatives: The Double Continuation Region," Management Science, INFORMS, vol. 61(5), pages 1094-1107, May.
    3. Anna Battauz & Marzia De Donno & Alessandro Sbuelz, 2012. "Real options with a double continuation region," Quantitative Finance, Taylor & Francis Journals, vol. 12(3), pages 465-475, April.
    4. Hasan A. Fallahgoul & Young S. Kim & Frank J. Fabozzi & Jiho Park, 2019. "Quanto Option Pricing with Lévy Models," Computational Economics, Springer;Society for Computational Economics, vol. 53(3), pages 1279-1308, March.
    5. J. D. Evans & R. Kuske & Joseph B. Keller, 2002. "American options on assets with dividends near expiry," Mathematical Finance, Wiley Blackwell, vol. 12(3), pages 219-237, July.
    6. Jing, Bo & Li, Shenghong & Ma, Yong, 2021. "Consistent pricing of VIX options with the Hawkes jump-diffusion model," The North American Journal of Economics and Finance, Elsevier, vol. 56(C).
    7. Chan, Tat Lung (Ron), 2020. "Hedging and pricing early-exercise options with complex fourier series expansion," The North American Journal of Economics and Finance, Elsevier, vol. 54(C).
    8. Jérôme Detemple & Weidong Tian, 2002. "The Valuation of American Options for a Class of Diffusion Processes," Management Science, INFORMS, vol. 48(7), pages 917-937, July.
    9. Barro, Robert J. & Liao, Gordon Y., 2021. "Rare disaster probability and options pricing," Journal of Financial Economics, Elsevier, vol. 139(3), pages 750-769.
    10. Ng, Andrew C.Y. & Li, Johnny Siu-Hang & Chan, Wai-Sum, 2013. "Pricing options on stocks denominated in different currencies: Theory and illustrations," The North American Journal of Economics and Finance, Elsevier, vol. 26(C), pages 339-354.
    11. Bakshi, Gurdip & Cao, Charles & Chen, Zhiwu, 1997. "Empirical Performance of Alternative Option Pricing Models," Journal of Finance, American Finance Association, vol. 52(5), pages 2003-2049, December.
    12. Wang, Xingchun, 2021. "Valuation of options on the maximum of two prices with default risk under GARCH models," The North American Journal of Economics and Finance, Elsevier, vol. 57(C).
    13. Wang, Xingchun, 2021. "The values and incentive effects of options on the maximum or the minimum of the stock prices and market index," The North American Journal of Economics and Finance, Elsevier, vol. 55(C).
    14. Marzia De Donno & Zbigniew Palmowski & Joanna Tumilewicz, 2020. "Double continuation regions for American and Swing options with negative discount rate in Lévy models," Mathematical Finance, Wiley Blackwell, vol. 30(1), pages 196-227, January.
    15. Mark Broadie & Jerome B. Detemple, 2004. "ANNIVERSARY ARTICLE: Option Pricing: Valuation Models and Applications," Management Science, INFORMS, vol. 50(9), pages 1145-1177, September.
    16. Li, Zhe & Zhang, Wei-Guo & Liu, Yong-Jun, 2018. "European quanto option pricing in presence of liquidity risk," The North American Journal of Economics and Finance, Elsevier, vol. 45(C), pages 230-244.
    17. Jérôme Detemple, 2014. "Optimal Exercise for Derivative Securities," Annual Review of Financial Economics, Annual Reviews, vol. 6(1), pages 459-487, December.
    18. Bakshi, Gurdip & Carr, Peter & Wu, Liuren, 2008. "Stochastic risk premiums, stochastic skewness in currency options, and stochastic discount factors in international economies," Journal of Financial Economics, Elsevier, vol. 87(1), pages 132-156, January.
    19. Anna Pavlova & Roberto Rigobon, 2007. "Asset Prices and Exchange Rates," The Review of Financial Studies, Society for Financial Studies, vol. 20(4), pages 1139-1180.
    20. Wang, Guanying & Wang, Xingchun & Shao, Xinjian, 2022. "Exchange options for catastrophe risk management," The North American Journal of Economics and Finance, Elsevier, vol. 59(C).
    21. Wang, Xingchun & Zhang, Han, 2022. "Pricing basket spread options with default risk under Heston–Nandi GARCH models," The North American Journal of Economics and Finance, Elsevier, vol. 59(C).
    22. Kim, Young Shin & Lee, Jaesung & Mittnik, Stefan & Park, Jiho, 2015. "Quanto option pricing in the presence of fat tails and asymmetric dependence," Journal of Econometrics, Elsevier, vol. 187(2), pages 512-520.
    23. Sirio Aramonte & Mohammad R. Jahan-Parvar & Samuel Rosen & John W. Schindler, 2022. "Firm-Specific Risk-Neutral Distributions with Options and CDS," Management Science, INFORMS, vol. 68(9), pages 7018-7033, September.
    24. Yu, Xisheng, 2021. "A unified entropic pricing framework of option: Using Cressie-Read family of divergences," The North American Journal of Economics and Finance, Elsevier, vol. 58(C).
    25. Bakshi, Gurdip & Panayotov, George, 2013. "Predictability of currency carry trades and asset pricing implications," Journal of Financial Economics, Elsevier, vol. 110(1), pages 139-163.
    26. Broadie, Mark & Detemple, Jerome, 1996. "American Option Valuation: New Bounds, Approximations, and a Comparison of Existing Methods," The Review of Financial Studies, Society for Financial Studies, vol. 9(4), pages 1211-1250.
    27. Anna Battauz & Marzia De Donno & Janusz Gajda & Alessandro Sbuelz, 2022. "Optimal exercise of American put options near maturity: A new economic perspective," Review of Derivatives Research, Springer, vol. 25(1), pages 23-46, April.
    28. Gurdip Bakshi & Charles Cao & Zhaodong (Ken) Zhong, 2021. "Assessing models of individual equity option prices," Review of Quantitative Finance and Accounting, Springer, vol. 57(1), pages 1-28, July.
    29. George Andrew Karolyi & Ying Wu, 2021. "Is Currency Risk Priced in Global Equity Markets? [Exposure to currency risk: definition and measurement]," Review of Finance, European Finance Association, vol. 25(3), pages 863-902.
    30. Anna Battauz & Francesco Rotondi, 2022. "American options and stochastic interest rates," Computational Management Science, Springer, vol. 19(4), pages 567-604, October.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Lee, Hangsuck & Ha, Hongjun & Lee, Minha, 2023. "Partial quanto lookback options," The North American Journal of Economics and Finance, Elsevier, vol. 64(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Medvedev, Alexey & Scaillet, Olivier, 2010. "Pricing American options under stochastic volatility and stochastic interest rates," Journal of Financial Economics, Elsevier, vol. 98(1), pages 145-159, October.
    2. Anna Battauz & Marzia De Donno & Alessandro Sbuelz, 2015. "Real Options and American Derivatives: The Double Continuation Region," Management Science, INFORMS, vol. 61(5), pages 1094-1107, May.
    3. Jérôme Detemple, 2014. "Optimal Exercise for Derivative Securities," Annual Review of Financial Economics, Annual Reviews, vol. 6(1), pages 459-487, December.
    4. Cosma, Antonio & Galluccio, Stefano & Pederzoli, Paola & Scaillet, Olivier, 2020. "Early Exercise Decision in American Options with Dividends, Stochastic Volatility, and Jumps," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 55(1), pages 331-356, February.
    5. Detemple, Jérôme & Laminou Abdou, Souleymane & Moraux, Franck, 2020. "American step options," European Journal of Operational Research, Elsevier, vol. 282(1), pages 363-385.
    6. Anna Battauz & Marzia De Donno & Janusz Gajda & Alessandro Sbuelz, 2022. "Optimal exercise of American put options near maturity: A new economic perspective," Review of Derivatives Research, Springer, vol. 25(1), pages 23-46, April.
    7. Jonas Al-Hadad & Zbigniew Palmowski, 2020. "Perpetual American options with asset-dependent discounting," Papers 2007.09419, arXiv.org, revised Jan 2021.
    8. João Nunes, 2011. "American options and callable bonds under stochastic interest rates and endogenous bankruptcy," Review of Derivatives Research, Springer, vol. 14(3), pages 283-332, October.
    9. Zbigniew Palmowski & Jos'e Luis P'erez & Kazutoshi Yamazaki, 2020. "Double continuation regions for American options under Poisson exercise opportunities," Papers 2004.03330, arXiv.org.
    10. Antonio Cosma & Stefano Galluccio & Paola Pederzoli & O. Scaillet, 2012. "Valuing American Options Using Fast Recursive Projections," Swiss Finance Institute Research Paper Series 12-26, Swiss Finance Institute.
    11. Cheng Cai & Tiziano De Angelis & Jan Palczewski, 2022. "The American put with finite‐time maturity and stochastic interest rate," Mathematical Finance, Wiley Blackwell, vol. 32(4), pages 1170-1213, October.
    12. Marzia De Donno & Zbigniew Palmowski & Joanna Tumilewicz, 2020. "Double continuation regions for American and Swing options with negative discount rate in Lévy models," Mathematical Finance, Wiley Blackwell, vol. 30(1), pages 196-227, January.
    13. Zbigniew Palmowski & José Luis Pérez & Kazutoshi Yamazaki, 2021. "Double continuation regions for American options under Poisson exercise opportunities," Mathematical Finance, Wiley Blackwell, vol. 31(2), pages 722-771, April.
    14. Aricson Cruz & José Carlos Dias, 2020. "Valuing American-style options under the CEV model: an integral representation based method," Review of Derivatives Research, Springer, vol. 23(1), pages 63-83, April.
    15. Wang, Xingchun, 2022. "Pricing vulnerable options with stochastic liquidity risk," The North American Journal of Economics and Finance, Elsevier, vol. 60(C).
    16. Gapeev, Pavel V., 2020. "Optimal stopping problems for running minima with positive discounting rates," LSE Research Online Documents on Economics 105849, London School of Economics and Political Science, LSE Library.
    17. Blessing Taruvinga & Boda Kang & Christina Sklibosios Nikitopoulos, 2018. "Pricing American Options with Jumps in Asset and Volatility," Research Paper Series 394, Quantitative Finance Research Centre, University of Technology, Sydney.
    18. Li, Zhe & Zhang, Wei-Guo & Liu, Yong-Jun, 2018. "European quanto option pricing in presence of liquidity risk," The North American Journal of Economics and Finance, Elsevier, vol. 45(C), pages 230-244.
    19. Kirkby, J. Lars & Nguyen, Duy & Cui, Zhenyu, 2017. "A unified approach to Bermudan and barrier options under stochastic volatility models with jumps," Journal of Economic Dynamics and Control, Elsevier, vol. 80(C), pages 75-100.
    20. Simon Scheidegger & Adrien Treccani, 2021. "Pricing American Options under High-Dimensional Models with Recursive Adaptive Sparse Expectations [Telling from Discrete Data Whether the Underlying Continuous-Time Model Is a Diffusion]," Journal of Financial Econometrics, Oxford University Press, vol. 19(2), pages 258-290.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:ecofin:v:62:y:2022:i:c:s1062940822000870. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/620163 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.