Foreign Exchange Options on Heston-CIR Model Under Lévy Process Framework

Giacomo Ascione, Farshid Mehrdoust, Giuseppe Orlando and Oldouz Samimi

Applied Mathematics and Computation, 2023, vol. 446, issue C

Abstract: In this paper, we consider the Heston-CIR model with Lévy process for pricing in the foreign exchange (FX) market by providing a new formula that better fits the distribution of prices. To do that, first, we study the existence and uniqueness of the solution to this model. Second, we examine the strong convergence of the Lévy process with stochastic domestic short interest rates, foreign short interest rates and stochastic volatility. Then, we apply Least Squares Monte Carlo (LSMC) method for pricing American options under our model with stochastic volatility and stochastic interest rate. Finally, by considering real-world market data, we illustrate numerical results for the four-factor Heston-CIR Lévy model.

Keywords: Heston-CIR model; Variance gamma process; Lévy processes; Foreign short interest rates (search for similar items in EconPapers)
JEL-codes: C22 F31 G15 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:apmaco:v:446:y:2023:i:c:s0096300323000206

DOI: 10.1016/j.amc.2023.127851

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