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Difficulty: Hard
Category: Options & Greeks
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Topics: quanto, options, correlation, fx
A U.S.-based hedge fund is considering trading a quanto option on the Nikkei 225 index. This option will pay out in U.S. dollars based on the performance of the Nikkei 225. The fund's quant team is debating the appropriate pricing model. Ignoring interest rate differentials and dividends for simplicity, what additional parameter, beyond the volatilities of the Nikkei 225 and the USD/JPY exchange rate, is crucial for accurately pricing this quanto option?
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