An analytic multi-currency model with stochastic volatility and stochastic interest rates

Alessandro Gnoatto and Martino Grasselli

Papers from arXiv.org

Abstract: We introduce a tractable multi-currency model with stochastic volatility and correlated stochastic interest rates that takes into account the smile in the FX market and the evolution of yield curves. The pricing of vanilla options on FX rates can be performed effciently through the FFT methodology thanks to the affinity of the model Our framework is also able to describe many non trivial links between FX rates and interest rates: a second calibration exercise highlights the ability of the model to fit simultaneously FX implied volatilities while being coherent with interest rate products.

Date: 2013-02, Revised 2013-03
New Economics Papers: this item is included in nep-cba, nep-ifn and nep-mon
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Citations: View citations in EconPapers (8)

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