A Multi-currency Model with FX Volatility Skew
Vladimir Piterbarg
Barclays Capital
February 7, 2005
Abstract:
The paper develops a multi-currency model with FX skew for power-reverse dual-currency (PRDC) swaps, with a particular emphasis on model calibration to FX options across different maturities and strikes. New theoretical results on locally-optimal Markovian projections are obtained. When combined with powerful skew averaging techniques, a fast and robust calibration method is developed. The impact of the FX skew on cancellable and knockout PRDC swaps is analyzed.
Number of Pages in PDF File: 25
Keywords: FX hybrids, Power-reverse dual-currency notes, PRDC, FX volatility skew, three-factor model, multi-currency model
working papers series
Suggested Citation
Piterbarg, Vladimir, A Multi-currency Model with FX Volatility Skew (February 7, 2005). Available at SSRN: http://ssrn.com/abstract=685084 or http://dx.doi.org/10.2139/ssrn.685084
