Local Volatility Pricing Models for Long-Dated FX Derivatives

Griselda Deelstra and Gr�gory Ray�e
Authors registered in the RePEc Author Service: Grégory Rayée

Applied Mathematical Finance, 2013, vol. 20, issue 4, 380-402

Abstract: We study the local volatility function in the foreign exchange (FX) market, where both domestic and foreign interest rates are stochastic. This model is suitable to price long-dated FX derivatives. We derive the local volatility function and obtain several results that can be used for the calibration of this local volatility on the FX option's market. Then, we study an extension to obtain a more general volatility model and propose a calibration method for the local volatility associated with this model.

Date: 2013
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Working Paper: Local Volatility Pricing Models for Long-dated FX Derivatives (2012)
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DOI: 10.1080/1350486X.2012.723516

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