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Pricing Exchange Rate Options and Quanto Caps in the Cross-Currency Random Field LIBOR Market Model (2103.00323v2)

Published 27 Feb 2021 in q-fin.PR, math.PR, and q-fin.MF

Abstract: We develop an arbitrage-free random field LIBOR market model to price cross-currency derivatives. The uncertainty of the forward LIBOR rates of our cross-currency model is driven by a two time parameter random field instead of a finite dimensional Brownian motion. To demonstrate the applications of this model, we develop an approximate closed-form pricing formula for Quanto caps and cross-currency swaps. Further, we derive an exact pricing formula for an exchange rate option in the random field setting.