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Cross-currency smile calibration

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Author Info

  • Gabriel Turinici

    ()
    (CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - CNRS : UMR7534 - Université Paris IX - Paris Dauphine)

  • Marc Laillat

    (Adfin Analytics team - Thsomson Reuters)

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    Abstract

    We document the numerical aspects of the calibration of cross-currency options on the local volatility framework. We consider the partial differential equation satisfied by the price of the cross-currency option and see that the most important specifications to set are the boundary conditions. We explain how these conditions can be approximated and test the validity of the approximation on simple cases.

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    File URL: http://hal.archives-ouvertes.fr/docs/00/35/10/16/PDF/cross_smile_gt2.pdf
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    Bibliographic Info

    Paper provided by HAL in its series Post-Print with number hal-00351016.

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    Date of creation: 01 Feb 2009
    Date of revision:
    Publication status: Published - Presented, Modelling, Identification and Control, 2009, Innsbruck, Austria
    Handle: RePEc:hal:journl:hal-00351016

    Note: View the original document on HAL open archive server: http://hal.archives-ouvertes.fr/hal-00351016
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    Web page: http://hal.archives-ouvertes.fr/

    Related research

    Keywords: cross-currency options; calibration; local volatility; implied volatility; Dupire formula; adjoint; boundary conditions;

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