quanto caplet is a contract that pays at
an amount proportional
to
units of dollar. The
is the
Libor.
Hence, from the $ point of view, the value of the contract
is
The
is a martingale with respect to the
measure:
We wish to transform to the
measure.
Hence, we use the (
Change of
numeraire
recipe
)
The combination under the logsign is the forward exchange rate
(
Forward exchange rate
) for the time
as observed at
Therefore,
Similarly to the previous section we now construct a martingale combination
and observe that the price of the contract is given by the BlackScholes type
formula.
