hard · Quantitative Finance
A foreign equity index S follows dS/S=μ,dt+σ_S,dW^S in its own (foreign) currency, and the domestic-per-foreign FX rate X follows dX/X=μ_X,dt+σ_X,dW^X, with dW^S,dW^X=ρ,dt. A quanto forward pays, in domestic currency at time T, the value S_T converted at a FIXED contractual FX rate (not the realized X_T).
Under the domestic risk-neutral measure, what is the correct drift of S used to price this quanto payoff, given foreign rate r_f and dividend yield q?
- r_f-q-ρ,σ_S,σ_X
- r_d-q-ρ,σ_S,σ_X, using the domestic rate r_d in place of the foreign rate
- r_f-q+ρ,σ_S,σ_X, adding the covariance rather than subtracting it
- r_f-q, since a fixed conversion rate removes any FX dependence from the drift
Sign up free to see the explanation and track your rank →
More Quantitative Finance practice
- If the underlying stock price S moves by +$2.00 over a very short interval, what is the es
- What is the estimated OLS slope hatβ?
- If the flat yield curve is at 4% (continuously compounded), what is the bond's price?
- As the number of assets n approaches infinity, what happens to the total portfolio varianc
- What is the fair no-arbitrage price for a six-month (T = 0.5) forward contract?
- If the risk-neutral probability of an up move is p = 0.6 and the risk-free rate is zero, w
- When pricing a 'Digital' (or Binary) call option near expiry with the spot price very clos
- Calculate the price of a zero-coupon bond that pays $1000 in two years, given that the one