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Calibration of implied volatility for the exchange rate for the Chinese Yuan from its derivatives

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  • Liang, J.
  • Gao, Y.

Abstract

Revised implied volatility curves and surfaces for the Chinese Yuan (CNY) exchange rate are obtained from market quotations for CNY non-deliverable options by solving an inverse problem of foreign exchange option pricing, which is calculated using a regularization approach in an optimal control framework. To take account of the market expectation for the CNY exchange rate, a stochastic adjusted factor is applied that follows a Vasicek model with parameters fitted from market quotations for CNY non-deliverable forwards. A well-posed numerical scheme is implemented.

Suggested Citation

  • Liang, J. & Gao, Y., 2012. "Calibration of implied volatility for the exchange rate for the Chinese Yuan from its derivatives," Economic Modelling, Elsevier, vol. 29(4), pages 1278-1285.
    • Handle: RePEc:eee:ecmode:v:29:y:2012:i:4:p:1278-1285
    DOI: 10.1016/j.econmod.2012.03.026
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    References listed on IDEAS

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    1. Guonan Ma & Corrinne Ho & Robert N McCauley, 2004. "The markets for non-deliverable forwards in Asian currencies," BIS Quarterly Review, Bank for International Settlements, June.
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    7. Yu, Jialin, 2007. "Closed-form likelihood approximation and estimation of jump-diffusions with an application to the realignment risk of the Chinese Yuan," Journal of Econometrics, Elsevier, vol. 141(2), pages 1245-1280, December.
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    Cited by:

    1. Al-Shboul, Mohammad & Anwar, Sajid, 2014. "Time-varying exchange rate exposure and exchange rate risk pricing in the Canadian Equity Market," Economic Modelling, Elsevier, vol. 37(C), pages 451-463.

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