Multivariate FX models with jumps: triangles, Quantos and implied correlation

Ballotta, L., Deelstra, G. & Rayée, G. (2017). Multivariate FX models with jumps: triangles, Quantos and implied correlation. European Journal of Operational Research, doi: 10.1016/j.ejor.2017.02.018

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Abstract

We propose an integrated model of the joint dynamics of FX rates and asset prices for the pricing of FX derivatives, including Quanto products; the model is based on a multivariate construction for Levy processes which proves to be analytically tractable. The approach allows for simultaneous calibration to market volatility surfaces of currency triangles, and also gives access to market consistent information on dependence between the relevant variables. A successful joint calibration to real market data is presented for the particular case of the Variance Gamma process.

Item Type: Article
Uncontrolled Keywords: Option pricing; Calibration procedure; Implied correlation; Multivariate Lévy processes; Quanto products
Subjects: H Social Sciences > HG Finance
Divisions: Cass Business School > Faculty of Finance
URI: http://openaccess.city.ac.uk/id/eprint/16661

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