Quanto Option Pricing in the Parsimonious Heston Model
Abstract
This paper develops a framework for pricing Quanto options using the Parsimonious Multi-Asset Heston model. The approach extends the classical Heston stochastic volatility model by incorporating correlations between asset prices and exchange rates, allowing for more accurate valuation of cross-currency derivatives.
The model is calibrated using both historical and market data, and Monte Carlo simulation techniques are applied to estimate option prices. Empirical results demonstrate that the proposed model outperforms the traditional Black-Scholes approach, particularly in capturing volatility dynamics and cross-asset correlations.
The study confirms that the Parsimonious Heston model provides a more flexible and realistic framework for pricing Quanto options in incomplete and imperfect financial markets.
References
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Wilmott, P. (2006). Paul Wilmott on Quantitative Finance.
Wong, B., & Heyde, C. (2006). On Changes of Measure in Stochastic Volatility Models.
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