Title
FX volatility smile constructionFX volatility smile construction
Author
Faculty/Department
Faculty of Sciences. Mathematics and Computer Science
Publication type
article
Publication
Subject
Economics
Mathematics
Source (journal)
Wilmott
Volume/pages
(2012):60, p. 58-69
ISSN
1540-6962
Carrier
E
Target language
English (eng)
Full text (Publishers DOI)
Abstract
The foreign exchange options market is one of the largest and most liquid OTC derivative markets in the world. Surprisingly, very little is known in the academic literature about the construction of the most important object in this market: The implied volatility smile. The smile construction procedure and the volatility quoting mechanisms are FX specific and differ significantly from other markets. We give a brief overview of these quoting mechanisms and provide a comprehensive introduction to the resulting smile construction problem. Furthermore, we provide a new formula which can be used for an efficient and robust FX smile construction.