Heston Model Calibration in the Brazilian Foreign Exchange (FX) Options Market

Marcelo Nóbrega da Costa and Joe Yoshino
Additional contact information
Marcelo Nóbrega da Costa: Dresdner Bank do Brasil

Brazilian Review of Finance, 2004, vol. 2, issue 1, 23-46

Abstract: Despite the relatively recent advance in the derivative industry, the European FX option market uses simple models such as Black (1976) or Garman and Kohlhagen (1983). This widespread practice hides very important quantitative effects that could be better explored by using alternative pricing models such as the one that incorporates the stochastic volatility features. Understanding and calibrating this type of pricing model represents a challenge in the current state of art in financial engineering, specially in emerging markets that are characterized by strong volatilities, periodic changing regimes and in most case suffering of liquidity, specially during the crisis. In this sense, this paper shows how to implement the Hestons Model for the Brazilian FX option market. This approach uses the volatility matrix provided by a pool of domestic market players. Although the Hestons Model presents a formal analytical solution it does not require simulation-, the closed form solutions show a mathematical complexity. Thus, the main objective of this work is to implement this model in the Brazilian FX market.

Keywords: Heston's model; stochastic volatility; FX derivatives (search for similar items in EconPapers)
JEL-codes: C36 F34 G13 (search for similar items in EconPapers)
Date: 2004
References: Add references at CitEc
Citations:

Downloads: (external link)
http://bibliotecadigital.fgv.br/ojs/index.php/rbfin/article/download/1134/397 (application/pdf)
http://bibliotecadigital.fgv.br/ojs/index.php/rbfin/article/view/1134 (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:brf:journl:v:2:y:2004:i:1:p:23-46

Access Statistics for this article

Brazilian Review of Finance is currently edited by Marcio Laurini

More articles in Brazilian Review of Finance from Brazilian Society of Finance
Bibliographic data for series maintained by Marcio Laurini ().