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

Ballotta, L., Deelstra, G. and Rayée, G. (2017). Multivariate FX models with jumps: triangles, Quantos and implied correlation. European Journal of Operational Research, 260(3), pp. 1181-1199. doi: 10.1016/j.ejor.2017.02.018

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.

Publication Type: Article
Publisher Keywords: Option pricing; Calibration procedure; Implied correlation; Multivariate Lévy processes; Quanto products
Subjects: H Social Sciences > HG Finance
Departments: Cass Business School > Finance
URI: http://openaccess.city.ac.uk/id/eprint/16661
[img] Text - Accepted Version
This document is not freely accessible until 24 February 2019 due to copyright restrictions.
Available under License Creative Commons Attribution Non-commercial No Derivatives.

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