FX Market Behavior and Valuation

Abstract:     
Lecture notes for a short course on FX option valuation. Includes:

- Mathematical framework for FX valuation

- Handling the smile and term structure for vanilla options (calls and puts):
--- Interpolation issues and techniques
--- Handling business time
--- Handling market conventions

- Pricing of barrier options:
--- Attention to the joints along with the marginals
--- Barrier option pricing models
------ Black-Scholes
------ Vanna-volga
------ Semi-static hedging
------ Stochastic volatility - the Heston model
------ Local volatility
------ Stochastic local volatility
------ Random risk reversal model

- Hedging performance as a measure of model quality.

Number of Pages in PDF File: 41

Keywords: Foreign exchange, Forex, FX, Foreign, Call, Put, Vanilla, Black-Scholes, Vanna-volga, Hedging, Stochastic, volatility, local volatility, Random risk reversal, Stochastic skew, skew, term structure, numerical methods, interpolation, business time

JEL Classification: C63, C69, F31, G13, G15, C51, C52

working papers series