Grzelak, Lech and Oosterlee, Kees (2010): On crosscurrency models with stochastic volatility and correlated interest rates.

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Abstract
We construct multicurrency models with stochastic volatility and correlated stochastic interest rates with a full matrix of correlations. We frst deal with a foreign exchange (FX) model of Hestontype, in which the domestic and foreign interest rates are generated by the shortrate process of HullWhite [HW96]. We then extend the framework by modeling the interest rate by a stochastic volatility displaceddiffusion Libor Market Model [AA02], which can model an interest rate smile. We provide semiclosed form approximations which lead to effcient calibration of the multicurrency models. Finally, we add a correlated stock to the framework and discuss the construction, model calibration and pricing of equity FXinterest rate hybrid payoffs.
Item Type:  MPRA Paper 

Original Title:  On crosscurrency models with stochastic volatility and correlated interest rates 
Language:  English 
Keywords:  Foreignexchange (FX); stochastic volatility; Heston model; stochastic interest rates; interest rate smile; forward characteristic function; hybrids; affne diffusion; effcient calibration. 
Subjects:  G  Financial Economics > G1  General Financial Markets F  International Economics > F3  International Finance G  Financial Economics > G1  General Financial Markets > G13  Contingent Pricing ; Futures Pricing 
Item ID:  23020 
Depositing User:  Lech A. Grzelak 
Date Deposited:  04 Jun 2010 10:22 
Last Modified:  26 Sep 2019 09:08 
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URI:  https://mpra.ub.unimuenchen.de/id/eprint/23020 