Work

Foreign Exchange Options Under Stochastic Volatility and Stochastic Interest Rates

Year: 2008

Type: article

Abstract: In this paper, we present a stochastic volatility model with stochastic interest rates in a Foreign Exchange (FX) setting. The instantaneous volatility follows a mean-reverting Ornstein–Uhlenbeck process and is correlated with the exchange rate. The domestic and foreign interest rates are modeled by mean-reverting Ornstein–Uhlenbeck processes. The main result is an analytic formula for the price of a European call on the exchange rate. It is derived using martingale methods in arbitrage pricing of contingent claims and Fourier inversion techniques.

Source: International Journal of Theoretical and Applied Finance

DOI: 10.1142/s0219024908004804

Author: REHEZ AHLIP

Institution: Western Sydney University

Language: English

Topic: Stochastic processes and financial applications

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: green

OpenAlex ID: W2091581716

FWCI: 4.66

Cites: 29

Cited by: 25

Related to: 10