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Currency Derivatives Under a Minimal Market with Random Scaling

Heath, David; Platen, Eckhard

Description

This paper uses an alternative, parsimonious stochastic volatility model to describe the dynamics of a currency market for the pricing and hedging of derivatives. Time transformed squared Bessel processes are the basic driving factors of the minimal market model. The time transformation is characterized by a random scaling, which provides for realistic exchange rate dynamics. The pricing of standard European options is studied. In particular, it is shown that the model produces implied...[Show more]

CollectionsANU Research Publications
Date published: 2005
Type: Journal article
URI: http://hdl.handle.net/1885/85328
Source: International Journal of Theoretical and Applied Finance
DOI: 10.1142/S0219024905003360

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