A locally-built, LLM-digested index of recent arXiv papers in quant finance, geometry/topology, and statistical ML — keyword search served straight from SQLite on this machine.
The study finds flaws in methods used to estimate foreign exchange option prices.
Unified pricing method for FX options with barriers.
New FX option interpolations impact implied volatilities.
Model accurately calibrates FX market skew for exotic options.
In this note we discuss - in what is intended to be a pedagogical fashion - FX option pricing in target zones with attainable boundaries. The boundaries must be reflecting. The no-arbitrage requirement implies that the differential (foreign minus domestic) short-rate is not deterministic. When the band is narrow, we ca…
Paper extends Lévy models with memory to better price FX double barrier options.
This paper proposes two numerical solution based on Product Optimal Quantization for the pricing of Foreign Echange (FX) linked long term Bermudan options e.g. Bermudan Power Reverse Dual Currency options, where we take into account stochastic domestic and foreign interest rates on top of stochastic FX rate, hence we c…
We suggest an intermediate currency approach that allows us to price options on all FX markets simultaneously under the same risk-neutral measure which ensures consistency of FX option prices across all markets. In particular, it is sufficient to calibrate a model to the volatility smile on the domestic market as, due …
Study option pricing in sideways markets and target zones.
This paper proposes a numerical method for pricing foreign exchange (FX) options in a model which deals with stochastic interest rates and stochastic volatility of the FX rate. The model considers four stochastic drivers, each represented by an Itô's diffusion with time--dependent drift, and with a full matrix of corre…
This paper gives an arbitrage-free prediction for future prices of an arbitrary co-terminal set of options with a given maturity, based on the observed time series of these option prices. The statistical analysis of such a multi-dimensional time series of option prices corresponding to strikes (with large, e.g.…
We develop an expansion approach for the pricing of European quanto options written on LIBOR rates (of a foreign currency). We derive the dynamics of the system of foreign LIBOR rates under the domestic forward measure and then consider the price of the quanto option. In order to take the skew/smile effect observed in …
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 effciently through the FFT methodology thanks to the affinit…
This paper improves VAE-based imputation of FX implied volatilities, reducing errors and handling uncertainty.
It is known that the implied volatility skew of FX options demonstrates a stochastic behavior which is called stochastic skew. In this paper we create stochastic skew by assuming the spot/instantaneous variance correlation to be stochastic. Accordingly, we consider a class of SLV models with stochastic correlation wher…
We study the local volatility function in the Foreign Exchange market where both domestic and foreign interest rates are stochastic. This model is suitable to price long-dated FX derivatives. We derive the local volatility function and obtain several results that can be used for the calibration of this local volatility…
The Heston model stands out from the class of stochastic volatility (SV) models mainly for two reasons. Firstly, the process for the volatility is non-negative and mean-reverting, which is what we observe in the markets. Secondly, there exists a fast and easily implemented semi-analytical solution for European options.…
An Entropic Dynamics of exchange rates is laid down to model the dynamics of foreign exchange rates, FX, and European Options on FX. The main objective is to represent an alternative framework to model dynamics. Entropic inference is an inductive inference framework equipped with proper tools to handle situations where…
We examine the Foreign Exchange (FX) spot price spreads with and without Last Look on the transaction. We assume that brokers are risk-neutral and they quote spreads so that losses to latency arbitrageurs (LAs) are recovered from other traders in the FX market. These losses are reduced if the broker can reject, ex-post…
Develops a new model for multi-currency volatility using CBI-time-changed Lévy processes.
Paper examines floating exercise boundaries for American options in time-inhomogeneous models.
Option written on several foreign exchange rates (FXRs) depends on correlation between the rates. To evaluate the option, historical estimates for correlations can be used but usually they are not stable. More significantly, pricing of the option using these estimates is usually inconsistent to the traded vanilla contr…
Investigates optimal strategies for market makers using internal liquidity.
This paper is devoted to the application of an -minimisation technique to construct an arbitrage-free call-option surface. We propose a nononparametric approach to obtaining model-free call option surfaces that are perfectly consistent with market quotes and free of static arbitrage. The approach is inspired from…
This work addresses the problem of optimal pricing and hedging of a European option on an illiquid asset Z using two proxies: a liquid asset S and a liquid European option on another liquid asset Y. We assume that the S-hedge is dynamic while the Y-hedge is static. Using the indifference pricing approach we derive a HJ…
Double no-touch options, contracts which pay out a fixed amount provided an underlying asset remains within a given interval, are commonly traded, particularly in FX markets. In this work, we establish model-free bounds on the price of these options based on the prices of more liquidly traded options (call and digital …
Option pricing is the most elemental challenge of mathematical finance. Knowledge of the prices of options at every strike is equivalent to knowing the entire pricing distribution for a security, as derivatives contingent on the security can be replicated using options. The available data may be insufficient to determi…
We present a general derivation of the arbitrage-free pricing framework for multiple-currency collateralized products. We include the impact on option pricing of the policy adopted to fund in foreign currency, so that we are able to price contracts with cash flows and/or collateral accounts expressed in foreign currenc…
Develops semi-closed form solutions for barrier and American options on time-dependent OU process.
We study Vanna-Volga methods which are used to price first generation exotic options in the Foreign Exchange market. They are based on a rescaling of the correction to the Black-Scholes price through the so-called `probability of survival' and the `expected first exit time'. Since the methods rely heavily on the approp…
We study the problem of optimal pricing and hedging of a European option written on an illiquid asset using a set of proxies: a liquid asset , and liquid European options , each written on a liquid asset . We assume that the -hedge is dynamic while the multi-name -hedge is static. Usin…
A dealer manages quotes and rejection rules to control slippage risk in FX markets.
Paper defines conditions for feasible correlation matrices from factor structures.
We derived similar to Bo et al. (2010) results but in the case when the dynamics of the FX rate is driven by a general Merton jump-diffusion process. The main results of our paper are as follows: 1) formulas for the Esscher transform parameters which ensure that the martingale condition for the discounted foreign excha…
New method for efficient pricing of double barrier options in Lévy models.
This paper offers a mathematical framework to manage inventory risk in FX cash markets.
Paper uses Chebyshev Tensors for accurate dynamic sensitivities and ISDA SIMM computation.
There is intense interest in understanding the stochastic and dynamical properties of the global Foreign Exchange (FX) market, whose daily transactions exceed one trillion US dollars. This is a formidable task since the FX market is characterized by a web of fluctuating exchange rates, with subtle inter-dependencies wh…
Method to decompose portfolio performance into FX, interest rate, carry, and residual market risks.
Paper examines two methods for FX market volatility modeling.
Study compares models for pricing multi-strike quanto call options with SV, SC, and SER.
A time series model for the FX dynamics is presented which takes into account structural peculiarities of the market, namely its heterogeneity and an information flow from long to short time horizons. The model emerges from an analogy between FX dynamics and hydrodynamic turbulence. The heterogeneity of the market is m…
The Local Volatility model is a well-known extension of the Black-Scholes constant volatility model whereby the volatility is dependent on both time and the underlying asset. This model can be calibrated to provide a perfect fit to a wide range of implied volatility surfaces. The model is easy to calibrate and still ve…
Proposes a new framework for invariant quadratic P&L predictions in option books.
This paper offers a framework for FX dealers to decide between internalizing and externalizing their market making to balance risk control and costs.
We introduce a novel multi-factor Heston-based stochastic volatility model, which is able to reproduce consistently typical multi-dimensional FX vanilla markets, while retaining the (semi)-analytical tractability typical of affine models and relying on a reasonable number of parameters. A successful joint calibration t…
TDA improves FX clustering quality over traditional methods.
Simple method solves Quanto Skew problem.