Pricing and Hedging Strategies for Cross-Currency Equity Protection Swaps

[2409.19387] Pricing and Hedging Strategies for Cross-Currency Equity Protection Swaps Skip to main content Search Submit Donate Log in Search arXiv Press Enter to search · Advanced search Quantitative Finance > Mathematical Finance arXiv:2409.19387 (q-fin) [Submitted on 28 Sep 2024 ( v1 ), last revised 9 Apr 2026 (this version, v2)] Title: Pricing and Hedging Strategies for Cross-Currency Equity Protection Swaps Authors: Marek Rutkowski , Huansang Xu View a PDF of the paper titled Pricing and Hedging Strategies for Cross-Currency Equity Protection Swaps, by Marek Rutkowski and Huansang Xu View PDF HTML (experimental) Abstract: In this paper, we explore the pricing and hedging strategies for an innovative insurance product called the equity protection swap(EPS). Notably, we focus on the application of EPSs involving cross-currency reference portfolios, reflecting the realities of investor asset diversification across different economies. The research examines key considerations regarding exchange rate fluctuations, pricing and hedging frameworks, in order to satisfy dynamic requirements from EPS buyers. We differentiate between two hedging paradigms: one where domestic and foreign equities are treated separately using two EPS products and another that integrates total returns across currencies. Through detailed analysis, we propose various hedging strategies with consideration of different types of returns - nominal, effective, and quanto - for EPS products in both separate and aggregated contexts. The aggregated hedging portfolios contain basket options with cross-currency underlying asset, which only exists in the OTC market, thus we further consider a superhedging strategy using single asset European options for aggregated returns. A numerical study assesses hedging costs and performance metrics associated with these hedging strategies, illuminating practical implications for EPS providers and investors engaged in international markets. We further employ Monte Carlo simulations for the basket option pricing, together with two other approximation methods - geometric averaging and moment matching. This work contributes to enhancing fair pricing mechanisms and risk management strategies in the evolving landscape of cross-currency financial derivatives. Comments: 32 pages Subjects: Mathematical Finance (q-fin.MF) MSC classes: 91G20, 91G60 ACM classes: G.1.10; G.1.8 Cite as: arXiv:2409.19387 [q-fin.MF] (or arXiv:2409.19387v2 [q-fin.MF] for this version) https://doi.org/10.48550/arXiv.2409.19387 Focus to learn more arXiv-issued DOI via DataCite Submission history From: Huansang Xu [ view email ] [v1] Sat, 28 Sep 2024 15:27:28 UTC (620 KB) [v2] Thu, 9 Apr 2026 04:09:15 UTC (2,371 KB) Full-text links: Access Paper: View a PDF of the paper titled Pricing and Hedging Strategies for Cross-Currency Equity Protection Swaps, by Marek Rutkowski and Huansang Xu View PDF HTML (experimental) TeX Source view license Current browse context: q-fin.MF < prev | next > new | recent | 2024-09 Change to browse by: q-fin References & Citations NASA ADS Google Scholar Semantic Scholar export BibTeX citation Loading... BibTeX formatted citation × loading... 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