SECOND-ORDER STOCHASTIC VOLATILITY ASYMPTOTICS AND THE PRICING OF FOREIGN EXCHANGE DERIVATIVES

Tommaso Pellegrino ()
Additional contact information
Tommaso Pellegrino: Market Risk Quant Team, Danske Bank, Holmens Kanal 2, 1092, Copenhagen, Denmark

International Journal of Theoretical and Applied Finance (IJTAF), 2020, vol. 23, issue 03, 1-30

Abstract: We consider models for the pricing of foreign exchange derivatives, where the underlying asset volatility as well as the one for the foreign exchange rate are stochastic. Under this framework, singular perturbation methods have been used to derive first-order approximations for European option prices. In this paper, based on a previous result for the calibration and pricing of single underlying options, we derive the second-order approximation pricing formula in the two-dimensional case and we apply it to the pricing of foreign exchange options.

Keywords: FX derivatives pricing; stochastic volatility; asymptotic analysis; singular perturbation theory (search for similar items in EconPapers)
Date: 2020
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.worldscientific.com/doi/abs/10.1142/S0219024920500211
Access to full text is restricted to subscribers

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wsi:ijtafx:v:23:y:2020:i:03:n:s0219024920500211

Ordering information: This journal article can be ordered from

DOI: 10.1142/S0219024920500211

Access Statistics for this article

International Journal of Theoretical and Applied Finance (IJTAF) is currently edited by L P Hughston

More articles in International Journal of Theoretical and Applied Finance (IJTAF) from World Scientific Publishing Co. Pte. Ltd.
Bibliographic data for series maintained by Tai Tone Lim ().