Pricing Currency Options with a Market Model of Interest Rates under Jump-Diffusion Stochastic Volatility Processes of Spot Exchange Rates
AbstractThis paper proposes a pricing method of currency options with a market model of interest rates. Using a simple approximation and a Fourier transform method, we derive a formula of the option pricing under jump-diffusion stochastic volatility processes of spot exchange rates. As an application, we apply the formula to the calibration of volatility smiles in the JPY/USD currency option market. Moreover, using the approximate prices as a control variate, we achieve substantial variance reduction in Monte Carlo simulation.
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Bibliographic InfoPaper provided by CIRJE, Faculty of Economics, University of Tokyo in its series CIRJE F-Series with number CIRJE-F-451.
Date of creation: Dec 2006
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