Implied Correlation for Pricing multi-FX options

Economy – Quantitative Finance – Pricing of Securities

Scientific paper

Rate now

  [ 0.00 ] – not rated yet Voters 0   Comments 0

Details

Scientific paper

Option written on several foreign exchange rates (FXRs) depends on correlation between the rates. To evaluate the option, historical estimates for correlations can be used but usually they are not stable. More significantly, pricing of the option using these estimates is usually inconsistent to the traded vanilla contracts. To price options written on several FXRs with the same denominating currency, financial practitioners and traders often use implied correlations calculated from implied volatilities of FXRs that form "currency triangles". However, some options may have underlying FXRs with different denominating currencies. In this paper, we present the formula for the implied correlations between such FXRs. These can be used for valuation, for example, barrier option on two FXRs with different denominating currencies where one FXR determines how much the option is in or out of the money at maturity while another FXR is related to the barrier. Other relevant options are straightforward.

No associations

LandOfFree

Say what you really think

Search LandOfFree.com for scientists and scientific papers. Rate them and share your experience with other people.

Rating

Implied Correlation for Pricing multi-FX options does not yet have a rating. At this time, there are no reviews or comments for this scientific paper.

If you have personal experience with Implied Correlation for Pricing multi-FX options, we encourage you to share that experience with our LandOfFree.com community. Your opinion is very important and Implied Correlation for Pricing multi-FX options will most certainly appreciate the feedback.

Rate now

     

Profile ID: LFWR-SCP-O-443402

All data on this website is collected from public sources. Our data reflects the most accurate information available at the time of publication.