Quanto Option Pricing and the Correlation-Adjusted Forward

Summary

The document presents a pricing question for vanilla quanto options on commodity forwards. It proposes adjusting the forward by an exponential term involving the correlation between the underlying and foreign exchange rate, their volatilities, and time to expiry. The suggested next step is to price the option using that adjusted forward and the domestic interest rate, meaning the currency in which the premium is paid.

A comparison with a market pricing screen shows a discrepancy in the example, but the document does not include the full option inputs or an answer explaining its source. It therefore illustrates that a correlation-adjusted forward alone may not reproduce a market quote under the stated setup, while leaving the required conventions and model details unresolved. The example is not enough to identify a correction or judge whether the difference reflects assumptions, inputs, or implementation.

Key ideas

• Quanto pricing can require a forward adjustment linked to FX and underlying volatility and their correlation.
• The proposed approach prices the option with the adjusted forward and the domestic currency rate.
• The example reports a gap between the proposed calculation and a market screen quote.
• The document omits sufficient inputs and a resolution to determine the cause of the pricing difference.

Tags

# How to price quanto options


# How to price quanto options












Trying to price vanilla quanto options on forwards (commodities).

I expected the calculation to be as simple as using the adjusted forward:

$$F_{\text{adj}} = F \cdot e^{-\rho \sigma_{\text{fx}} \sigma_{\text{undl}} T }$$

and then price the option with this forward and the rate for the domestic currency (the one the premium is paid in).

This does not match bloomberg's OVML prices, what am I doing wrong?

EDIT: sample price

BBG price: 75.832

Local price: 74.097

Error: 2.29%

Params:







- Rate (domestic): 0.018





- T: 2

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.