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, Taylor & Francis Journals, vol. 20(4), pages 380-402, September.
- NEP-ALL-2012-04-10 (All new papers)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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"Vanna-Volga Methods Applied To Fx Derivatives: From Theory To Market Practice,"
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- Fr\'ed\'eric Bossens & Gr\'egory Ray\'ee & Nikos S. Skantzos & Griselda Deelstra, 2009. "Vanna-Volga methods applied to FX derivatives : from theory to market practice," Papers 0904.1074, arXiv.org, revised May 2010.
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- Griselda Deelstra & Gr\'egory Ray\'ee, 2012. "Pricing Variable Annuity Guarantees in a Local Volatility framework," Papers 1204.0453, arXiv.org, revised Apr 2012.
- Alessandro Gnoatto & Martino Grasselli, 2013. "An analytic multi-currency model with stochastic volatility and stochastic interest rates," Papers 1302.7246, arXiv.org, revised Mar 2013.
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