Quanto

Abstract: Financial valuation OF GMWBs: We develop a variety of methods for assessing the cost and value of a very popular ‘rider’ available to North American investors on variable annuity (VA) policies called a Guaranteed Minimum Withdrawal Benefit (GMWB). The GMWB promises to return the entire initial investment, albeit spread over an extended period of time, regardless of subsequent market performance. First, we take a static approach that assumes individuals behave passively and holds the product to maturity. We show how the product can be decomposed into a Quanto Asian Put plus a generic term-certain annuity. At the other extreme of consumer behavior, the dynamic approach leads to an optimal stopping problem akin to pricing an American put option, albeit complicated by the non-traditional payment structure. Our main result is that the No Arbitrage hedging cost of a GMWB ranges from 73 to 160 basis points of assets. In contrast, most products in the market only charge 30–45 basis points. Although we suggest a number of behavioral reasons for the apparent under-pricing of this feature in a typically overpriced VA market, we conclude by arguing that current pricing is not sustainable and that GMWB fees will eventually have to increase or product design will have to change in order to avoid blatant arbitrage opportunities.

Abstract: We present Quanto, a network-wide time and energy profiler for embedded network devices. By combining well-defined interfaces for hardware power states, fast high-resolution energy metering, and causal tracking of programmer-defined activities, Quanto can map how energy and time are spent on nodes and across a network. Implementing Quanto on the TinyOS operating system required modifying under 350 lines of code and adding 1275 new lines. We show that being able to take fine-grained energy consumption measurements as fast as reading a counter allows developers to precisely quantify the effects of low-level system implementation decisions, such as using DMA versus direct bus operations, or the effect of external interference on the power draw of a low duty-cycle radio. Finally, Quanto is lightweight enough that it has a minimal effect on system behavior: each sample takes 100 CPU cycles and 12 bytes of RAM.

Abstract: We develop an arbitrage-free discrete time model to price American-style claims for which domestic term structure risk, foreign term structure risk, and currency risk are important This model combines a discrete version of the Heath, Jarrow, and Morton (1992) term structure model with the binomial model of Cox, Ross, and Rubinstein (1979) It converges (weakly) to the continuous time models in Amin and Jarrow (1991, 1992) The general model is "path dependent" and can be implemented with arbitrary volatility functions to value claims with maturity up to five years The model is illustrated with applications to long-dated American currency warrants and a cross-rate swap from the quanto class Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies

Abstract: The duality principle in option pricing aims at simplifying valuation problems that depend on several variables by associating them to the corresponding dual option pricing problem. Here, we analyze the duality principle for options that depend on several assets. The asset price processes are driven by general semimartingales, and the dual measures are constructed via an Esscher transformation. As an application, we can relate swap and quanto options to standard call and put options. Explicit calculations for jump models are also provided.