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Multivariate FX models with jumps: Triangles, Quantos and implied correlation

Laura Ballotta, Griselda Deelstra and Grégory Rayée ()

European Journal of Operational Research, 2017, vol. 260, issue 3, 1181-1199

Abstract: We propose an integrated model of the joint dynamics of FX rates and asset prices for the pricing of FX derivatives, including Quanto products; the model is based on a multivariate construction for Lévy processes which proves to be analytically tractable. The approach allows for simultaneous calibration to market volatility surfaces of currency triangles, and also gives access to market consistent information on dependence between the relevant variables. A successful joint calibration to real market data is presented for the particular case of the Variance Gamma process.

Keywords: Option pricing; Calibration procedure; Implied correlation; Multivariate Lévy processes; Quanto products, (search for similar items in EconPapers)
Date: 2017
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Handle: RePEc:eee:ejores:v:260:y:2017:i:3:p:1181-1199