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Languages : da
Pages : 74
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Author:
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ISBN:
Category :
Languages : da
Pages : 74
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Author: Lech A. Grzelak
Publisher:
ISBN:
Category :
Languages : en
Pages : 26
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Book Description
We construct multi-currency models with stochastic volatility and correlated stochastic interest rates with a full matrix of correlations. We first deal with a foreign exchange (FX) model of Heston-type, in which the domestic and foreign interest rates are generated by the short-rate process of Hull-White [HW96]. We then extend the framework by modeling the interest rate by a stochastic volatility displaced-diffusion Libor Market Model [AA02], which can model an interest rate smile. We provide semi-closed form approximations which lead to efficient calibration of the multi-currency models. Finally, we add a correlated stock to the framework and discuss the construction, model calibration and pricing of equity-FX-interest rate hybrid payoffs.
Author: Lech Aleksander Grzelak
Publisher:
ISBN:
Category :
Languages : en
Pages : 27
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Author: Mr.Eugenio M Cerutti
Publisher: International Monetary Fund
ISBN: 1484395212
Category : Business & Economics
Languages : en
Pages : 36
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Book Description
For about three decades until the Global Financial Crisis (GFC), Covered Interest Parity (CIP) appeared to hold quite closely—even as a broad macroeconomic relationship applying to daily or weekly data. Not only have CIP deviations significantly increased since the GFC, but potential macrofinancial drivers of the variation in CIP deviations have also become significant. The variation in CIP deviations seems to be associated with multiple factors, not only regulatory changes. Most of these do not display a uniform importance across currency pairs and time, and some are associated with possible temporary considerations (such as asynchronous monetary policy cycles).
Author: Alessandro Gnoatto
Publisher:
ISBN:
Category :
Languages : en
Pages : 43
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Book Description
We introduce a tractable multi-currency model with stochastic volatility and correlated stochastic interest rates that takes into account the smile in the FX market and the evolution of yield curves. The pricing of vanilla options on FX rates can be performed efficiently through the FFT methodology thanks to the affinity of the model. A joint calibration exercise of the implied volatility surfaces of a triangle of FX rates shows the flexibility of our framework in dealing with the typical symmetries that characterize the FX market. Our framework is also able to describe many non trivial links between FX rates and interest rates: a second calibration exercise highlights the ability of the model to fi t simultaneously FX implied volatilities while being coherent with interest rate products.
Author: Wolfgang Benner
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Category :
Languages : en
Pages :
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We develop a rigorous two-currency pricing framework that can be constructed under either a domestic or a foreign currency numeraire. While plain vanilla interest rate derivative prices are recovered by design, exotic cross-currency interest rate products can be priced by determining no-arbitrage drifts for both the domestic and the foreign LIBORs under a uniform probability measure and by specifying the dynamics of the domestic and foreign currency leg of the exotic product. In a single-currency world, no-arbitrage drifts can always be found by specifying the evolution of the terminal LIBOR as a function of bond price volatilities, first, and solving for the drifts of all remaining LIBORs by backward induction. After introducing a second currency, we show that traditional backward induction for the second currency must fail due to interdependence between the respective bond price volatilities and LIBOR dynamics. In order to resolve any such interdependence, we propose calibrating the volatility function of the spot exchange rate to the terminal maturity spectrum of FX options and specifying a functional form for all dates prior to the terminal one. By choosing a multi-factor model setup, rather than relying on terminal decorrelation within a single-factor model, we allow for model calibration to an exogenous market correlation mix. Extending the model, we outline modifications to account for volatility skews by introducing displaced-diffusion to the LIBOR and FX rate dynamics.
Author: Tarek Alexander Hassan
Publisher:
ISBN:
Category : Economics
Languages : en
Pages : 61
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Book Description
We decompose violations of uncovered interest parity into a cross-currency, a between-time-and-currency, and a cross-time component. We show that most of the systematic violations are in the cross-currency dimension. By contrast, we find no statistically reliable evidence that currency risk premia respond to deviations of forward premia from their time- and currency-specific mean. These results imply that the forward premium puzzle (FPP) and the carry-trade anomaly are separate phenomena that may require separate explanations. The carry trade is driven by static differences in interest rates across currencies, whereas the FPP appears to be driven primarily by cross-time variation in all currency risk premia against the US dollar. Models that feature two symmetric countries thus cannot explain either of the two phenomena. Once we make the appropriate econometric adjustments we also cannot reject the hypothesis that the elasticity of risk premia with respect to forward premia in all three dimensions is smaller than one. As a result, currency risk premia need not be correlated with expected changes in exchange rates.
Author:
Publisher: Lulu.com
ISBN: 9291316695
Category : Bank capital
Languages : en
Pages : 294
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Book Description
Author: Mr.Fei Han
Publisher: International Monetary Fund
ISBN: 1498325394
Category : Business & Economics
Languages : en
Pages : 19
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Book Description
The yen is an important barometer for the Japanese economy. Depreciations are typically associated with favorable economic developments such as increased corporate profits, rising equity prices, and upward pressure on domestic consumer prices. On the other hand, large and sharp appreciations run the risk of lowering actual and expected inflation, squeezing corporate profits, generating a negative wealth effect through depressed equity prices, and reducing confidence in the Bank of Japan’s efforts to reflate the domestic economy and achieve the inflation target. This paper takes a closer look at underlying drivers of rapid yen appreciations, highlighting the key role of carry-trade and the zero lower bound as important amplifiers.
Author: Andrew Green
Publisher: John Wiley & Sons
ISBN: 111855678X
Category : Business & Economics
Languages : en
Pages : 548
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Book Description
Thorough, accessible coverage of the key issues in XVA XVA – Credit, Funding and Capital Valuation Adjustments provides specialists and non-specialists alike with an up-to-date and comprehensive treatment of Credit, Debit, Funding, Capital and Margin Valuation Adjustment (CVA, DVA, FVA, KVA and MVA), including modelling frameworks as well as broader IT engineering challenges. Written by an industry expert, this book navigates you through the complexities of XVA, discussing in detail the very latest developments in valuation adjustments including the impact of regulatory capital and margin requirements arising from CCPs and bilateral initial margin. The book presents a unified approach to modelling valuation adjustments including credit risk, funding and regulatory effects. The practical implementation of XVA models using Monte Carlo techniques is also central to the book. You'll also find thorough coverage of how XVA sensitivities can be accurately measured, the technological challenges presented by XVA, the use of grid computing on CPU and GPU platforms, the management of data, and how the regulatory framework introduced under Basel III presents massive implications for the finance industry. Explores how XVA models have developed in the aftermath of the credit crisis The only text to focus on the XVA adjustments rather than the broader topic of counterparty risk. Covers regulatory change since the credit crisis including Basel III and the impact regulation has had on the pricing of derivatives. Covers the very latest valuation adjustments, KVA and MVA. The author is a regular speaker and trainer at industry events, including WBS training, Marcus Evans, ICBI, Infoline and RISK If you're a quantitative analyst, trader, banking manager, risk manager, finance and audit professional, academic or student looking to expand your knowledge of XVA, this book has you covered.
