TITLE:
Valuation of Quanto Caps and Floors in a Calibrated Multi-Curve Cross-Currency LIBOR Market Model
AUTHORS:
Charity Wamwea, Philip Ngare, Martin Le Doux Mbele Bidima, Susan Mwelu
KEYWORDS:
Multiple Curves, Quanto, Cross Currency, LIBOR Market Model, Model Calibration, Cap or Floor Pricing
JOURNAL NAME:
Journal of Mathematical Finance,
Vol.9 No.4,
October
30,
2019
ABSTRACT: Interest rate derivatives form part of the largest portion of traded financial instruments. Hence, it is important to have models that describe their dynamics accurately. This study aims at pricing quanto caps and floors using the multi-curve cross-currency LIBOR market model (MCCCLMM) dynamics. A Black Scholes MCCCLMM quanto caplet and floorlet formula is first derived. The MCCCLMM parameters are then calibrated to exactly match the USD and GBP cap market prices. The estimated model parameters are then used to price the quanto options in the Black MCCCLMM quanto caplet and floorlet formula. These prices are then compared to the quanto cap and floor prices estimated via Monte Carlo simulations so as to ascertain its pricing accuracy.