Volume 11, Number 1, June 2016
| Quanto Reset Put Options |
Abstract
In this paper, a new derivative product is proposed for the Taiwan derivative market as well as the other foreign markets. Investors are concerned with not only foreign stock risk but also exchange rate risk when investing overseas. The Quanto options meet the investors’ concerns for exchange rate risk. To hedge against stock downside risk, a reset put option is a very effective tool. It can hedge against downside risk and more importantly lock in the upside gain because its reset feature adjusts upward the exercise price (the floor) when the underlying stock rises in price. In addition, a reset put option can also protect the value of a collateralized stock when investors finance to purchase the stock. Hence, we propose a new option product that combines the features of Quanto options and reset put options, called it as “Quanto reset put options”. The pricing model for the new option is derived. Their economic implications and hedging characteristics also are explored in details.
Keywords: Reset Options, Quanto Reset Put Options, Quanto Reset Premium
JEL Classification: G13