TY - JOUR

T1 - Pricing quanto equity swaps in a stochastic interest rate economy

AU - Chung, San Lin

AU - Yang, Hsiao Fen

PY - 2005/6

Y1 - 2005/6

N2 - This paper derives a pricing model for a quanto foreign equity/domestic floating rate swap in which one party pays domestic floating interest rates and receives foreign stock returns determined in the foreign currency, but is paid in the domestic currency. We use the risk-neutral valuation technique developed by Amin and Bodurtha to generate an arbitrage-free pricing model A closed-form solution is obtained under further restrictions on the drift rates of the asset price processes. Pricing formulae show that the value of a quanto equity swap at the start date does not depend on the foreign stock price level, but rather on the term structures of both countries and other parameters. However, the foreign stock price levels do affect the swap value times between two payment dates. The numerical implementations indicate that the domestic and foreign term structures, the correlation between the foreign interest rate and the exchange rate, and the correlation between the exchange rate and the foreign stock are more important factors in pricing a quanto equity swap than other correlations.

AB - This paper derives a pricing model for a quanto foreign equity/domestic floating rate swap in which one party pays domestic floating interest rates and receives foreign stock returns determined in the foreign currency, but is paid in the domestic currency. We use the risk-neutral valuation technique developed by Amin and Bodurtha to generate an arbitrage-free pricing model A closed-form solution is obtained under further restrictions on the drift rates of the asset price processes. Pricing formulae show that the value of a quanto equity swap at the start date does not depend on the foreign stock price level, but rather on the term structures of both countries and other parameters. However, the foreign stock price levels do affect the swap value times between two payment dates. The numerical implementations indicate that the domestic and foreign term structures, the correlation between the foreign interest rate and the exchange rate, and the correlation between the exchange rate and the foreign stock are more important factors in pricing a quanto equity swap than other correlations.

KW - Arbitrage-free pricing model

KW - Equity swaps

KW - Risk-neutral valuation

KW - Term structure of interest rates

UR - http://www.scopus.com/inward/record.url?scp=22144477553&partnerID=8YFLogxK

U2 - 10.1080/1350486042000297261

DO - 10.1080/1350486042000297261

M3 - 文章

AN - SCOPUS:22144477553

SN - 1350-486X

VL - 12

SP - 121

EP - 146

JO - Applied Mathematical Finance

JF - Applied Mathematical Finance

IS - 2

ER -