Calibration of implied volatility for the exchange rate for the Chinese Yuan from its derivatives

J. Liang and Y. Gao

Economic Modelling, 2012, vol. 29, issue 4, 1278-1285

Abstract: Revised implied volatility curves and surfaces for the Chinese Yuan (CNY) exchange rate are obtained from market quotations for CNY non-deliverable options by solving an inverse problem of foreign exchange option pricing, which is calculated using a regularization approach in an optimal control framework. To take account of the market expectation for the CNY exchange rate, a stochastic adjusted factor is applied that follows a Vasicek model with parameters fitted from market quotations for CNY non-deliverable forwards. A well-posed numerical scheme is implemented.

Keywords: Chinese Yuan derivatives; Interest rate parity; Stochastic interest rate adjustment; Market implied volatility; Revised implied volatility (search for similar items in EconPapers)
Date: 2012
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:29:y:2012:i:4:p:1278-1285

DOI: 10.1016/j.econmod.2012.03.026

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