A Hybrid Markov-Functional Model with Simultaneous Calibration to Interest Rate and FX Smile

23 Pages Posted: 20 Aug 2006

See all articles by Christian P. Fries

Christian P. Fries

Ludwig Maximilian University of Munich (LMU) - Faculty of Mathematics; DZ Bank AG

Fabian Eckstaedt

affiliation not provided to SSRN

Date Written: August 15, 2006

Abstract

In this paper we present a Markov functional hybrid interest rate/fx model which allows the calibration of a given market volatility surface in both dimension simultaneously. We extend the approach introduced in [FriesRott] by introducing a functional for the FX which allows a fast, yet accurate calibration to a given market fx volatility surface. This calibration procedure comes as an additional step to the known calibration of the LIBOR functional.

Keywords: Markov Functional Model, Hybrid Model, FX Model, Implied Modeling, Smile

Suggested Citation

Fries, Christian P. and Eckstaedt, Fabian, A Hybrid Markov-Functional Model with Simultaneous Calibration to Interest Rate and FX Smile (August 15, 2006). Available at SSRN: https://ssrn.com/abstract=925283 or http://dx.doi.org/10.2139/ssrn.925283

Christian P. Fries

Ludwig Maximilian University of Munich (LMU) - Faculty of Mathematics ( email )

Theresienstrasse 39
Munich
Germany

DZ Bank AG ( email )

60265 Frankfurt am Main
Germany

Fabian Eckstaedt (Contact Author)

affiliation not provided to SSRN ( email )

No Address Available

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