Hybrid Markov-Functional Model with Simultaneous Calibration to Interest Rate and FX Smile

Fries, Christian P.; Eckst├Ądt, Fabian: A Hybrid Markov-Functional Model with Simultaneous Calibration to Interest Rate and FX Smile.


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Abstract

In this paper we present a Markov functional hybrid interest rate / fx model which allows the calibration of a given market volatility surface in both dimension simultaneously. We extend the approach introduced in [FR] by introducing a functional for the FX which allows a fast, yet accurate calibration to a given market fx volatility surface. This calibration procedure comes as an additional step to the known calibration of the LIBOR functional.

The paper gives the main idea and the basic results of the hybrid Markov functional model with smile. For a more detailed discussion see also the diploma thesis of Fabian Eckst├Ądt.



Comments and suggestion welcomed at email@christian-fries.de.