Local Volatility Pricing Models for Long-dated FX Derivatives

2012/04/03 by Griselda Deelstra, Deelstra, Griselda, Grégory Rayée +1
Economics, Econometrics and Finance · #FOS: Economics and business #Pricing of Securities (q-fin.PR) #q-fin.PR

paper · pdf · doi:10.48550/arxiv.1204.0633

arxiv created 2012/04/03 · arxiv updated 2012/04/04

Abstract

We study the local volatility function in the Foreign Exchange 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 to this model.

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