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FX volatility smile construction

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  • Reiswich, Dimitri
  • Wystup, Uwe
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    Abstract

    The foreign exchange options market is one of the largest and most liquid OTC derivative markets in the world. Surprisingly, very little is known in the academic literature about the construction of the most important object in this market: The implied volatility smile. The smile construction procedure and the volatility quoting mechanisms are FX specific and differ significantly from other markets. We give a detailed overview of these quoting mechanisms and introduce the resulting smile construction problem. Furthermore, we provide a new formula which can be used for an efficient and robust FX smile construction. --

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    Bibliographic Info

    Paper provided by Frankfurt School of Finance and Management, Centre for Practical Quantitative Finance (CPQF) in its series CPQF Working Paper Series with number 20.

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    Date of creation: 2009
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    Handle: RePEc:zbw:cpqfwp:20

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    Related research

    Keywords: FX Quotations; FX Smile Construction; Risk Reversal; Butterfly; Strangle; Delta Conventions; Malz Formula;

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    Cited by:
    1. Carey, Alexander, 2010. "Higher-order volatility: time series," MPRA Paper 21087, University Library of Munich, Germany.

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