Efficient and Accurate Calibration to FX Market Skew with Fully Parameterized Local Volatility Model
Pricing of Securities
2023-04-24 v2
Abstract
When trading American and Asian options in the FX derivatives market, banks must calculate prices using a complex mathematical model. It is often observed that different models produce varying prices for the same exotic option, which violates the non-arbitrage requirement of derivative risk management. To address this issue, we have studied a fully parameterized local volatility model for pricing American/Asian options. This model, when implemented using a grid or Monte-Carlo numerical method, can be efficiently and accurately calibrated to FX market skew volatilities. As a result, the model can provide reliable prices for exotic options during daily trading activities.
Keywords
Cite
@article{arxiv.2211.14431,
title = {Efficient and Accurate Calibration to FX Market Skew with Fully Parameterized Local Volatility Model},
author = {Dongli Wu and Bufan Zhang and Xiao Lin},
journal= {arXiv preprint arXiv:2211.14431},
year = {2023}
}