A Multicurrency Extension of the Lognormal Interest Rate Market Models
AbstractThe Market Models of the term structure of interest rates, in which forward LIBOR or forward swap rates are modelled to be lognormal under the forward probability measure of the corresponding maturity, are extended to a multicurrency setting. If lognormal dynamics are assumed for forward swap rates in two currencies, for one maturity, with the dynamics for all other maturities given by no-arbitage relationships. Alternatively, one could choose forward interest rates in only one currency, say the domestic, to be lognormal and postulate lognormal dynamics for all forward exchange rates, with the dynamics of foreign interest rates determined by no-arbitrage relationships.
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Bibliographic InfoPaper provided by Quantitative Finance Research Centre, University of Technology, Sydney in its series Research Paper Series with number 20.
Date of creation: 01 Aug 1999
Date of revision:
Other versions of this item:
- Erik Schlögl, 2002. "A multicurrency extension of the lognormal interest rate Market Models," Finance and Stochastics, Springer, vol. 6(2), pages 173-196.
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
- F31 - International Economics - - International Finance - - - Foreign Exchange
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
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