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Semi-analytical Pricing of Currency Options in the Heston/CIR Jump-Diffusion Hybrid Model

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  • Rehez Ahlip
  • Marek Rutkowski

Abstract

We examine currency options in the jump-diffusion version of the Heston stochastic volatility model for the exchange rate. We assume, in addition, that the domestic and foreign stochastic interest rates are governed by the CIR dynamics. The instantaneous volatility is correlated with the dynamics of the exchange rate return, whereas the domestic and foreign short-term rates are assumed to be independent of the dynamics of the exchange rate and its volatility. The main result furnishes a semi-analytical formula for the price of the European currency call option in the hybrid foreign exchange/interest rates model.

Suggested Citation

  • Rehez Ahlip & Marek Rutkowski, 2015. "Semi-analytical Pricing of Currency Options in the Heston/CIR Jump-Diffusion Hybrid Model," Applied Mathematical Finance, Taylor & Francis Journals, vol. 22(1), pages 1-27, March.
    • Handle: RePEc:taf:apmtfi:v:22:y:2015:i:1:p:1-27
    DOI: 10.1080/1350486X.2014.928227
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    Cited by:

    1. Kim, See-Woo & Kim, Jeong-Hoon, 2020. "Pricing generalized variance swaps under the Heston model with stochastic interest rates," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 168(C), pages 1-27.

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