A multicurrency extension of the lognormal interest rate Market Models

Erik Schlogl

Finance and Stochastics, 2002, vol. 6, issue 2, 173-196

Abstract: The Market Models of the term structure of interest rates, in which forward LIBOR or forward swap rates are modelled to be lognormal under the forward probability measure of the corresponding maturity, are extended to a multicurrency setting. If lognormal dynamics are assumed for forward LIBOR or forward swap rates in two currencies, the forward exchange rate linking the two currencies can only be chosen to be lognormal for one maturity, with the dynamics for all other maturities given by no-arbitrage relationships. Alternatively, one could choose forward interest rates in only one currency, say the domestic, to be lognormal and postulate lognormal dynamics for all forward exchange rates, with the dynamics of foreign interest rates determined by no-arbitrage relationships.

Keywords: Lognormal LIBOR models; term structure of interest rates; currency options; interest rate options; change of measure (search for similar items in EconPapers)
JEL-codes: E43 F31 G13 (search for similar items in EconPapers)
Date: 2002-03-12
Note: received: July 1999; final version received: May 2001
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Citations: View citations in EconPapers (50)

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Working Paper: A Multicurrency Extension of the Lognormal Interest Rate Market Models (1999)
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