A cross-currency Levy market model

Ernst Eberlein and Nataliya Koval

Quantitative Finance, 2006, vol. 6, issue 6, 465-480

Abstract: The Levy Libor or market model which was introduced in Eberlein and Ozkan (The Levy Libor model. Financ. Stochast., 2005, 9, 327-348) is extended to a multi-currency setting. As an application we derive closed form pricing formulas for cross-currency derivatives. Foreign caps and floors and cross-currency swaps are studied in detail. Numerically efficient pricing algorithms based on bilateral Laplace transforms are derived. A calibration example is given for a two-currency setting (EUR, USD).

Keywords: Multi-currency model; Cross-currency derivatives; Foreign forward caps and floors; Cross-currency swaps; Time-inhomogeneous Levy processes; Forward martingale measure (search for similar items in EconPapers)
Date: 2006
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DOI: 10.1080/14697680600818791

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