Local Volatility Pricing Models for Long-dated FX Derivatives
AbstractWe 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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Bibliographic InfoPaper provided by arXiv.org in its series Papers with number 1204.0633.
Date of creation: Apr 2012
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Web page: http://arxiv.org/
Other versions of this item:
- Griselda Deelstra & Grégory Rayée, 2013. "Local Volatility Pricing Models for Long-Dated FX Derivatives," Applied Mathematical Finance, Taylor & Francis Journals, vol. 20(4), pages 380-402, September.
- NEP-ALL-2012-04-10 (All new papers)
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