Foreign exchange options on Heston-CIR model under L\'{e}vy process framework

Giacomo Ascione; Farshid Mehrdoust; Giuseppe Orlando; Oldouz Samimi

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arXiv · 2208.04030

Foreign exchange options on Heston-CIR model under L\'{e}vy process framework

Giacomo Ascione·Farshid Mehrdoust·Giuseppe Orlando·Oldouz Samimi

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Abstract

In this paper, we consider the Heston-CIR model with L\'{e}vy process for pricing in the foreign exchange (FX) market by providing a new formula that better fits the distribution of prices. To do that, first, we study the existence and uniqueness of the solution to this model. Second, we examine the strong convergence of the L\'{e}vy process with stochastic domestic short interest rates, foreign short interest rates and stochastic volatility. Then, we apply Least Squares Monte Carlo (LSM) method for pricing American options under our model with stochastic volatility and stochastic interest rate. Finally, by considering real-world market data, we illustrate numerical results for the four-factor Heston-CIR L\'{e}vy model.

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Giacomo Ascione, Farshid Mehrdoust, Giuseppe Orlando, Oldouz Samimi. 2022-08-08. Foreign exchange options on Heston-CIR model under L\'{e}vy process framework. https://arxiv.org/abs/2208.04030

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