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An analytic multi-currency model with stochastic volatility and stochastic interest rates

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  • Alessandro Gnoatto
  • Martino Grasselli
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    Abstract

    We introduce a tractable multi-currency model with stochastic volatility and correlated stochastic interest rates that takes into account the smile in the FX market and the evolution of yield curves. The pricing of vanilla options on FX rates can be performed effciently through the FFT methodology thanks to the affinity of the model Our framework is also able to describe many non trivial links between FX rates and interest rates: a second calibration exercise highlights the ability of the model to fit simultaneously FX implied volatilities while being coherent with interest rate products.

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    File URL: http://arxiv.org/pdf/1302.7246
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    Bibliographic Info

    Paper provided by arXiv.org in its series Papers with number 1302.7246.

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    Date of creation: Feb 2013
    Date of revision: Mar 2013
    Handle: RePEc:arx:papers:1302.7246

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