Correlation Options Pricing with Exchange Rate Risk under Regime-Switching Jump-Diffusion Models

The pricing problem of correlation options with exchange rate risk under the regime-switching jump-diffusion model is studied. Under the risk neutral measure, it is assumed that the exchange rate follows the regime-switching mean reversion model and the asset prices follow the regime-switching jump-diffusion models. The pricing formula of the correlation options with exchange rate risk is derived by using the measure transform and Fourier transform method. Moreover, the numerical results of option value are provided by the fast Fourier transform algorithm, and the effects of different models and some important parameters on the value of correlation options with exchange rate risk are analyzed.