model on rainbow option with underlying on different currency

quantcook · June 27th, 2013, 2:14 pm

I'm trying to price a rainbow option whose underlying are different index denominated in different currencies.Ouwehand's paper shows a closed form for underlying in same currency.I wonder what should the model be if it involves different currency, and rate.

daveangel · June 27th, 2013, 3:48 pm

you might just need to make the quanto adjustments and use the Ouwehand's approach after that

quantcook · June 27th, 2013, 5:14 pm

QuoteOriginally posted by: daveangelyou might just need to make the quanto adjustments and use the Ouwehand's approach after thatthat's what i'm thinking.but think in this way, this rainbow option definitely has a fx derivative in there, and quanto adjustment does not take fx rate into pricing, instead, it takes fx_foreign index correlation in the model.so by doing this, I will basically have a 0 fx derivative.same question applied to quanto option.