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Partial quanto lookback options

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  • Lee, Hangsuck
  • Ha, Hongjun
  • Lee, Minha

Abstract

Financial instruments for hedging and speculating on the foreign exchange rate and equity risks draw the attention of market participants as financial transactions increase across multiple jurisdictions. Notably, a quanto lookback option has been actively traded because it successfully meets market demands. Although the quanto lookback option provides numerous benefits, a high premium due to the lookback feature is the primary culprit that hinders investors from purchasing it. This paper proposes partial quanto lookback options and provides the closed-form pricing formulas when the lookback feature is applied to the exchange rate or equity value, and the extremes are determined by observing them for a shorter period than the life of the option. Because pricing the options is challenging due to their partial path-dependence, we develop the quanto extreme expectation that facilitates deriving the option prices. Extensive numerical examples demonstrate the efficacy of the partial quanto lookback options in lowering the premiums.

Suggested Citation

  • Lee, Hangsuck & Ha, Hongjun & Lee, Minha, 2023. "Partial quanto lookback options," The North American Journal of Economics and Finance, Elsevier, vol. 64(C).
    • Handle: RePEc:eee:ecofin:v:64:y:2023:i:c:s1062940822002066
    DOI: 10.1016/j.najef.2022.101871
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    References listed on IDEAS

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    Cited by:

    1. Lee, Hangsuck & Ha, Hongjun & Kim, Eunchae & Lee, Minha, 2024. "Quanto fund protection using partial lookback participation," The North American Journal of Economics and Finance, Elsevier, vol. 73(C).

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    More about this item

    Keywords

    Quanto lookback option; Partial monitoring; Quanto extreme expectation;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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