Author(s)

Charity Wamwea¹, Philip Ngare², Martin Le Doux Mbele Bidima³, Susan Mwelu⁴

¹Department of Mathematics, Pan African University Institute of Basic and Applied Sciences, Technology and Innovation, Nairobi, Kenya.
²School of Mathematics, The University of Nairobi, Nairobi, Kenya.
³Department of Mathematics, University of Yaoundé I, Yaounde, Cameroon.
⁴Department of Statistics and Actuarial Sciences, Jomo Kenyatta University of Agriculture and Technology, Nairobi, Kenya.

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.

Multiple Curves, Quanto, Cross Currency, LIBOR Market Model, Model Calibration, Cap or Floor Pricing

Wamwea, C. , Ngare, P. , Bidima, M. and Mwelu, S. (2019) Valuation of Quanto Caps and Floors in a Calibrated Multi-Curve Cross-Currency LIBOR Market Model. Journal of Mathematical Finance, 9, 698-725. doi: 10.4236/jmf.2019.94036.