Calibration of implied volatility for the exchange rate for the Chinese Yuan from its derivatives |
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Authors: | J Liang Y Gao |
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Institution: | 1. Department of Mathematics, Tongji University, 1239 SiPing Road, Shanghai 200092, PR China;2. China Development Bank, Shanghai Office, 68 Puming Road, Shanghai 200120, PR China |
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Abstract: | Revised implied volatility curves and surfaces for the Chinese Yuan (CNY) exchange rate are obtained from market quotations for CNY non-deliverable options by solving an inverse problem of foreign exchange option pricing, which is calculated using a regularization approach in an optimal control framework. To take account of the market expectation for the CNY exchange rate, a stochastic adjusted factor is applied that follows a Vasicek model with parameters fitted from market quotations for CNY non-deliverable forwards. A well-posed numerical scheme is implemented. |
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Keywords: | Chinese Yuan derivatives Interest rate parity Stochastic interest rate adjustment Market implied volatility Revised implied volatility |
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