Currency Derivatives under a Minimal Market Model with Random Scaling
This paper uses an alternative, parsimonious stochastic volatility model to describe the dynamics of a currency market for the pricing and hedging of derivatives. Time transformed squared Bessel processes are the basic driving factors of the minimal market model. The time transformation is characterized by a random scaling, which provides for realistic exchange rate dynamics. The pricing of standard European options is studied. In particular, it is shown that the model produces implied volatility surfaces that are typically observed in real markets.
|Date of creation:||01 Mar 2005|
|Date of revision:|
|Publication status:||Published as: Heath, D. and Platen, E., 2005, "Currency Derivatives under a Minimal Market Model with Random Scaling", International Journal of Theoretical and Applied Finance, 8(8), 1157-1177.|
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