Coherent Foreign Exchange Market Models
21 Pages Posted: 23 Jan 2013 Last revised: 23 Jan 2015
Date Written: January 22, 2015
A model describing the dynamics of a foreign exchange (FX) rate should preserve the same level of analytical tractability when the inverted FX process is considered. We show that affine stochastic volatility models satisfy such a requirement. Such a finding allows us to use affine stochastic volatility models as a building block for FX dynamics which are functionally-invariant with respect to the construction of suitable products/ratios of rates thus generalizing the model of (De Col et al., 2013).
Keywords: FX Options, foreign-domestic symmetry
JEL Classification: G120, G130
Suggested Citation: Suggested Citation