Pricing of FX options in the MPT/CIR jump-diffusion model with approximative fractional stochastic volatility

Jian-hao Kang, Ben-zhang Yang and Nan-jing Huang

Physica A: Statistical Mechanics and its Applications, 2019, vol. 532, issue C

Abstract: In this paper, the pricing of foreign exchange (FX) options is studied under the Moretto–Pasquali–Trivellato (MPT) stochastic volatility model by introducing an approximative fractional stochastic volatility and jumps, in which the FX rate has log-normal jump amplitudes, the volatility has asymmetric double exponential jump amplitudes, and the domestic and foreign interest rates are governed by Cox–Ingersoll–Ross (CIR) dynamics. By employing a suitable version of the Fourier inversion technique for corresponding conditional characteristic functions, a semi-analytical formula for the price of FX European call options is obtained under mild conditions. The behavior of the newly derived pricing formula is further demonstrated through some numerical experiments.

Keywords: Pricing of FX option; MPT model; CIR model; Jump-diffusion model; Approximative fractional stochastic volatility (search for similar items in EconPapers)
Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:532:y:2019:i:c:s0378437119311008

DOI: 10.1016/j.physa.2019.121871

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