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Multivariate FX models with jumps: Triangles, Quantos and implied correlation

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  • Ballotta, Laura
  • Deelstra, Griselda
  • Rayée, Grégory

Abstract

We propose an integrated model of the joint dynamics of FX rates and asset prices for the pricing of FX derivatives, including Quanto products; the model is based on a multivariate construction for Lévy processes which proves to be analytically tractable. The approach allows for simultaneous calibration to market volatility surfaces of currency triangles, and also gives access to market consistent information on dependence between the relevant variables. A successful joint calibration to real market data is presented for the particular case of the Variance Gamma process.

Suggested Citation

  • Ballotta, Laura & Deelstra, Griselda & Rayée, Grégory, 2017. "Multivariate FX models with jumps: Triangles, Quantos and implied correlation," European Journal of Operational Research, Elsevier, vol. 260(3), pages 1181-1199.
  • Handle: RePEc:eee:ejores:v:260:y:2017:i:3:p:1181-1199
    DOI: 10.1016/j.ejor.2017.02.018
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    References listed on IDEAS

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    Cited by:

    1. Kaeck, Andreas & Seeger, Norman J., 2020. "VIX derivatives, hedging and vol-of-vol risk," European Journal of Operational Research, Elsevier, vol. 283(2), pages 767-782.
    2. Branger, Nicole & Muck, Matthias & Seifried, Frank Thomas & Weisheit, Stefan, 2017. "Optimal portfolios when variances and covariances can jump," Journal of Economic Dynamics and Control, Elsevier, vol. 85(C), pages 59-89.
    3. Ballotta, Laura & Fusai, Gianluca & Marazzina, Daniele, 2019. "Integrated structural approach to Credit Value Adjustment," European Journal of Operational Research, Elsevier, vol. 272(3), pages 1143-1157.
    4. Michele Leonardo Bianchi & Gian Luca Tassinari, 2018. "Forward-looking portfolio selection with multivariate non-Gaussian models and the Esscher transform," Papers 1805.05584, arXiv.org, revised May 2018.
    5. Hasan A. Fallahgoul & Young S. Kim & Frank J. Fabozzi & Jiho Park, 2019. "Quanto Option Pricing with Lévy Models," Computational Economics, Springer;Society for Computational Economics, vol. 53(3), pages 1279-1308, March.

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