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Pricing Quanto and Composite Contracts with Local-Correlation Models

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  • Andrea Pallavicini

Abstract

Pricing composite and quanto contracts requires a joint model of both the underlying asset and the exchange rate. In this contribution, we explore the potential of local-correlation models to address the challenges of calibrating synthetic quanto forward contracts and composite options quoted in the market. Specifically, we design on-line calibration procedures for generic local and stochastic volatility models. The paper concludes with a numerical study assessing the calibration performance of these methodologies and comparing them to simpler approximations of the correlation structure.

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  • Andrea Pallavicini, 2025. "Pricing Quanto and Composite Contracts with Local-Correlation Models," Papers 2501.07200, arXiv.org.
    • Handle: RePEc:arx:papers:2501.07200
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    References listed on IDEAS

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    1. Branger, Nicole & Muck, Matthias, 2012. "Keep on smiling? The pricing of Quanto options when all covariances are stochastic," Journal of Banking & Finance, Elsevier, vol. 36(6), pages 1577-1591.
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