FOREIGN EXCHANGE OPTIONS UNDER STOCHASTIC VOLATILITY AND STOCHASTIC INTEREST RATES-Reference-Cited by-同舟云学术

FOREIGN EXCHANGE OPTIONS UNDER STOCHASTIC VOLATILITY AND STOCHASTIC INTEREST RATES

Published:2008-05 Issue:03 Volume:11 Page:277-294
ISSN:0219-0249
Container-title:International Journal of Theoretical and Applied Finance
language:en
Short-container-title:Int. J. Theor. Appl. Finan.

Author:

AHLIP REHEZ¹

Affiliation:

1. School of Computing and Mathematics, University of Western Sydney, Locked Bag 1797, Penrith South DC, NSW 1797, Australia

Abstract

In this paper, we present a stochastic volatility model with stochastic interest rates in a Foreign Exchange (FX) setting. The instantaneous volatility follows a mean-reverting Ornstein–Uhlenbeck process and is correlated with the exchange rate. The domestic and foreign interest rates are modeled by mean-reverting Ornstein–Uhlenbeck processes. The main result is an analytic formula for the price of a European call on the exchange rate. It is derived using martingale methods in arbitrage pricing of contingent claims and Fourier inversion techniques.

Publisher

World Scientific Pub Co Pte Lt

Subject

General Economics, Econometrics and Finance,Finance

Link

https://www.worldscientific.com/doi/pdf/10.1142/S0219024908004804

Reference25 articles.

1. Pricing foreign currency options under stochastic interest rates

2. Empirical Performance of Alternative Option Pricing Models

3. Empirical option pricing: a retrospection

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