Mathematical Finance & Financial Data Science Seminar
Calibrating FX local volatility or leverage functions with standard Monte-Carlo simulations
Speaker: Orcan Ogetbil, Wells Fargo
Location: Online Zoom access provided to registrants
Date: Tuesday, November 23, 2021, 5:30 p.m.
When building Cross-Currency local volatility models without or with stochastic volatility, one needs to determine local volatility or leverage functions that reprice given FX implied volatility surfaces under given interest rate models for both currencies. Standard approaches are to embed the repricing of the vanilla options in the model and use particle filters or to address the computation of the needed conditional expectations through PDE methods. In this talk, we present alternative methods that can be directly implemented purely through local computations and standard MC simulations. Such methods could be more easily integrated within standard MC simulation frameworks, do not require the development of new code and methods, and also run in higher dimensions where PDE methods are no longer feasible. First, we will present the models covered. Second, we will present the conditional expectations to be computed, derived from extended Dupire’s formulas. Third, we will present how to compute such expectations through standard MC simulations (and regressions, for the leverage function). Finally, we will present numerical results from calibration and repricing with FX and interest rate market data from 2020. This is joint work with Narayan Ganesan and Bernhard Hientzsch.
This event is free, but requires registration. Please click here to register