Efficient Calibration to FX Options by Markovian Projection in Cross-Currency Libor Market Models

14 Pages Posted: 10 Oct 2006

Date Written: October 10, 2006

Abstract

We revisit the cross-currency LIBOR Market Model armed with the technique of Markovian projection. We derive an efficient approximation for FX options and show how the FX skew can be modeled consistently with the interest rate skew in a common multifactor model.

Keywords: Cross Currency Libor Market Models, FX volatility skew, Markovian projection

JEL Classification: C3, C5, C6

Suggested Citation

Antonov, Alexandre and Misirpashaev, Timur, Efficient Calibration to FX Options by Markovian Projection in Cross-Currency Libor Market Models (October 10, 2006). Available at SSRN: https://ssrn.com/abstract=936087 or http://dx.doi.org/10.2139/ssrn.936087

Alexandre Antonov (Contact Author)

Danske Bank - Danske Markets ( email )

Holmens Kanal 2-12
DK-1092 Copenhagen K
Denmark

Timur Misirpashaev

Bloomberg LP ( email )

731 Lexington Ave
New York, NY 10022
United States

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