Pricing currency options in the Heston/CIR double exponential jump-diffusion model

Rehez Ahlip, Laurence A. F. Park () and Ante Prodan ()
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Rehez Ahlip: School of Computing Engineering and Mathematics, Western Sydney University, Penrith South, NSW 1797, Australia
Laurence A. F. Park: School of Computing Engineering and Mathematics, Western Sydney University, Penrith South, NSW 1797, Australia
Ante Prodan: School of Computing Engineering and Mathematics, Western Sydney University, Penrith South, NSW 1797, Australia

International Journal of Financial Engineering (IJFE), 2017, vol. 04, issue 01, 1-30

Abstract: We examine currency options in the double exponential 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.

Keywords: Heston’s model; CIR model; Kou’s double exponential jumps (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (4)

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DOI: 10.1142/S242478631750013X

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