Work

Local Volatility Pricing Models for Long-Dated FX Derivatives

Year: 2012

Type: article

Abstract: We study the local volatility function in the foreign exchange (FX) market, where both domestic and foreign interest rates are stochastic. This model is suitable to price long-dated FX derivatives. We derive the local volatility function and obtain several results that can be used for the calibration of this local volatility on the FX option's market. Then, we study an extension to obtain a more general volatility model and propose a calibration method for the local volatility associated with this model.

Source: Applied Mathematical Finance

DOI: 10.1080/1350486x.2012.723516

Authors: Griselda Deelstra, Grégory Rayée

Institution: Université Libre de Bruxelles

Language: English

Topic: Stochastic processes and financial applications

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: green

OpenAlex ID: W2952037034

FWCI: 4.769

Cites: 14

Cited by: 31

Related to: 10