A hybrid Markov-Functional model with simultaneous calibration to the interest rate and FX smile
Abstract
In this paper we present a Markov-Functional hybrid interest rate/foreign exchange model that allows calibration to given market volatility surfaces in both dimensions simultaneously. This is achieved by extending the approach introduced by Fries and Rott by a functional for the foreign exchange rate (FX), which allows a fast, yet accurate calibration to a given market FX volatility surface. This calibration procedure comes as an additional step to the known calibration of the LIBOR functional, resulting in an efficient implementation.Download Info
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Bibliographic Info
Article provided by Taylor and Francis Journals in its journal Quantitative Finance.
Volume (Year): 11 (2009)
Issue (Month): 4 ()
Pages: 587-597
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Related research
Keywords: Derivatives hedging; Derivatives pricing; Derivatives risk management; Derivative pricing models; Monte Carlo methods;References
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