A Multicurrency Extension of the Lognormal Interest Rate Market Models

13 Pages Posted: 1 Aug 1999

See all articles by Erik Schlögl

Erik Schlögl

University of Technology Sydney (UTS), Quantitative Finance Research Centre; University of Cape Town (UCT) - The African Institute of Financial Markets and Risk Management; Faculty of Science, Department of Statistics, University of Johannesburg; Financial Research Network (FIRN)

Date Written: July 1, 1999

Abstract

The Market Models of the term structure of interest rates, in which forward LIBOR or forward swap rates are modelled to be lognormal under the forward probability measure of the corresponding maturity, are extended to a multicurrency setting. If lognormal dynamics are assumed for forward LIBOR or forward swap rates in two currencies, the forward exchange rate linking the two currencies can only be chosen to be lognormal for one maturity, with the dynamics for all other maturities given by no-arbitrage relationships. Alternatively, one could choose forward interest rates in only one currency, say the domestic, to be lognormal and postulate lognormal dynamics for all forward exchange rates, with the dynamics of foreign interest rates determined by no-arbitrage relationships.

JEL Classification: G13, G15, E43

Suggested Citation

Schloegl, Erik, A Multicurrency Extension of the Lognormal Interest Rate Market Models (July 1, 1999). Available at SSRN: https://ssrn.com/abstract=170048 or http://dx.doi.org/10.2139/ssrn.170048

Erik Schloegl (Contact Author)

University of Technology Sydney (UTS), Quantitative Finance Research Centre ( email )

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HOME PAGE: http://www.schlogl.com

University of Cape Town (UCT) - The African Institute of Financial Markets and Risk Management ( email )

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Cape Town, Western Cape 7700
South Africa

Faculty of Science, Department of Statistics, University of Johannesburg ( email )

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South Africa

Financial Research Network (FIRN)

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St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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