Computational aspects of pricing foreign exchange options with stochastic volatility and stochastic interest rates

Rehez Ahlip, Rik King

    Research output: Contribution to journalArticle

    Abstract

    This paper presents an analytic result for the price of a European call option on a foreign exchange currency rate. Market volatility is assumed correlated with the exchange rate and interest rates, domestic and foreign, are assumed to be stochastic. Integrals involving interest rates are derived, characteristic functions are produced, and, with evaluation, the nature of the integrals involved in Fourier inversion is examined. By comparison with FX market data, some of the effects of the nature of stochastic interest rates upon option prices are examined.
    Original languageEnglish
    Pages (from-to)1256-1268
    Number of pages13
    JournalJournal Statistical Planning and Inference
    Volume140
    Issue number5
    DOIs
    Publication statusPublished - 2009

    Keywords

    • foreign exchange options
    • stochastic analysis

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