Pricing and Hedging Jamaican Dollar Quanto Options on the S&P 500 Index
Abstract
This paper presents a practical framework for pricing and hedging Jamaican Dollar (JMD) denominated quanto options, also known as guaranteed exchange rate options, on the S&P 500 Index. Historically, low liquidity in domestic equities has constrained the availability of advanced derivative products for local dealers. By leveraging the deep liquidity of the USDJMD spot market and US-listed options, this study demonstrates how local dealers can synthetically manufacture and dynamically hedge these exotic instruments. The proposed self-financing structure successfully isolates market exposure from exchange rate volatility. We also show that dynamic hedging strategies that incorporate adjusted delta positions and dynamic USD spot trading effectively mitigate the dealerâs residual market and FX risks. Ultimately, this framework provides a scalable foundation for expanding the universe of JMD-investable securities and advancing local capital market capabilities.
