TY - JOUR
T1 - Foreign exchange options under stochastic volatility and stochastic interest rates
AU - Ahlip, Rehez
PY - 2008
Y1 - 2008
N2 - 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.
AB - 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.
UR - http://handle.uws.edu.au:8081/1959.7/556017
U2 - 10.1142/S0219024908004804
DO - 10.1142/S0219024908004804
M3 - Article
SN - 0219-0249
VL - 11
SP - 277
EP - 294
JO - International Journal of Theoretical and Applied Finance
JF - International Journal of Theoretical and Applied Finance
IS - 3
ER -