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A Multi-currency Model with FX Volatility Skew

25 Pages Posted: 5 Apr 2005  

Vladimir Piterbarg

Independent

Date Written: 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.

Keywords: FX hybrids, Power-reverse dual-currency notes, PRDC, FX volatility skew, three-factor model, multi-currency model

Suggested Citation

Piterbarg, Vladimir, A Multi-currency Model with FX Volatility Skew (February 7, 2005). Available at SSRN: https://ssrn.com/abstract=685084 or http://dx.doi.org/10.2139/ssrn.685084

Vladimir Piterbarg (Contact Author)

Independent ( email )

No Address Available

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