Pricing Quanto and Composite Contracts with Local-Correlation Models

ArXiv ID: 2501.07200 “View on arXiv”

Authors: Unknown

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.

Keywords: Quanto Contracts, Local-Correlation Models, Stochastic Volatility, Online Calibration, Correlation Structure, Derivatives / FX

Complexity vs Empirical Score

• Math Complexity: 8.0/10
• Empirical Rigor: 3.0/10
• Quadrant: Lab Rats
• Why: The paper is highly theoretical, featuring advanced stochastic calculus, local-volatility models, and rigorous calibration derivations without any backtesting or implementation details.

  flowchart TD
    A["Research Goal<br>Model joint asset-FX dynamics<br>to price quanto & composite contracts"] --> B["Methodology<br>Local-Correlation Models<br>+ Stochastic Volatility"]
    B --> C["Data/Inputs<br>Market Quotes: Quanto Forwards<br>Composite Options, FX Volatilities"]
    C --> D["Computation<br>On-Line Calibration &<br>Calibration Performance Analysis"]
    D --> E["Key Outcomes<br>Effective local-correlation calibration<br>Benchmark vs. simpler approximations"]