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
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: Suggested Citation