Journal title
SIAM Journal on Financial Mathematics
DOI
10.1137/17M1114569
Issue
1
Volume
9
Last updated
2024-04-10T22:02:14.06+01:00
Page
127-170
Abstract
We study the Heston{Cox{Ingersoll{Ross++ stochastic-local volatility model in the context of foreign exchange markets and propose a Monte Carlo simulation scheme which combines the full truncation Euler scheme for the stochastic volatility component and the stochastic domestic and foreign short interest rates with the log-Euler scheme for the exchange rate. We establish the exponential integrability of full truncation Euler approximations for the Cox{Ingersoll{Ross process and find a lower bound on the explosion time of these exponential moments. Under a full correlation structure and a realistic set of assumptions on the so-called leverage function, we prove the strong convergence of the exchange rate approximations and deduce the convergence of Monte Carlo estimators for a number of vanilla and path-dependent options. Then, we perform a series of numerical experiments for an autocallable barrier dual currency note.
Symplectic ID
743788
Submitted to ORA
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Publication type
Journal Article
Publication date
24 Jan 2018