FX Market Behavior and Valuation

41 Pages Posted: 12 Jan 2007

See all articles by Harvey J. Stein

Harvey J. Stein

Two Sigma; Columbia University - Department of Mathematics

Date Written: December 13, 2006


Lecture notes for a short course on FX option valuation. Includes:

- Mathematical framework for FX valuation

- Handling the smile and term structure for vanilla options (calls and puts): --- Interpolation issues and techniques --- Handling business time --- Handling market conventions

- Pricing of barrier options: --- Attention to the joints along with the marginals --- Barrier option pricing models ------ Black-Scholes ------ Vanna-volga ------ Semi-static hedging ------ Stochastic volatility - the Heston model ------ Local volatility ------ Stochastic local volatility ------ Random risk reversal model

- Hedging performance as a measure of model quality.

Keywords: Foreign exchange, Forex, FX, Foreign, Call, Put, Vanilla, Black-Scholes, Vanna-volga, Hedging, Stochastic, volatility, local volatility, Random risk reversal, Stochastic skew, skew, term structure, numerical methods, interpolation, business time

JEL Classification: C63, C69, F31, G13, G15, C51, C52

Suggested Citation

Stein, Harvey J., FX Market Behavior and Valuation (December 13, 2006). Available at SSRN: https://ssrn.com/abstract=955831 or http://dx.doi.org/10.2139/ssrn.955831

Harvey J. Stein (Contact Author)

Two Sigma ( email )

100 6th Ave
New York, NY 10013
United States
10013 (Fax)

Columbia University - Department of Mathematics ( email )

New York, NY
United States

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