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currency in pricing
Hello,I have to price a structured product, so i need to consider the correlation matrix of my stocks.But I have international stocks in my basket. Do you know how I have to introduce that in my correlation matrix. for instance, if I have usd jpn and european stocks, is it better to use EUR/USD or USD/EUR in my correlation matrix because it is not the same if the third one isJPN/EUR or EUR/JPN?sounds not that smart !!!does anybody have an idea about this question?thx a lot
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- chocolatemoney
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currency in pricing
I don't know if I've understood your question.I would use price quotes all converted in base currency. That will sum up the stock price movements and the FX gains/losses.Anyway, I'm just thinking loud: I am a novice.
currency in pricing
mmmh...sounds not a bad idea..but your suggestion is for each date t to consider prices in AUR for instance with the exchange rate of date t (with EUR) and thento calculate returns and then calculate the matrix correlation used after for pricing.But often prices are taken in their money=> returns too=> and in the correlation matrix one introduce crossed exchange rates..but how, exactly?
currency in pricing
QuoteOriginally posted by: daveangelit all depends what your payoff is ...For instance a worstOfCould you tell it would be considered and if you use EUR/USD USD/EUR About what point one have to be careful?
currency in pricing
I meant in what way does the currency come in to the payoff ? Is it quanto or composite ?
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currency in pricing
ok looks like you are pricing a hybrid to keep things simple it is easy to quote everything in "USD" terms if you have got US stocks in your mix. Recall IBM is really IBM$ (ibm stock price in $ terms). This avoids having to do a quanto/drift adjustment if you are pricing with MC. So EURUSD is the natural quotation and is fine however USDJPY you will want to invert. HTH
currency in pricing
ok so if I have IBM, L'oreal, and Mitsubishi in my basket, do I have to put everything in EUR. And just making my pricing with the equities correlation matrix (so without crossing currencies). and the problem of currencies correlation is now ok???