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Modeling foreign exchange
The proposed project addresses the main challenge in modeling long-dated
(maturities of 30 years or more) foreign exchange (FX) interest rate (IR) hybrid
derivatives, namely the strong sensitivity of the products to the skew of the FX
volatility smiles via the use of a stochastic process, such as the Heston model.
Numerical methods based on a partial differential equation (PDE) approach will be
developed for the pricing of these derivatives.
The expected benefits of the project to the industrial partner are
(i) flexible modeling frameworks for long-dated FX-IR, which can be easily modified for
use for other long-dated hybrids, such as equities and commodities, and
(ii) highly-efficient PDE-based pricing methods for multi-dimensional financial
derivatives.
Faculty Supervisor:
Ken Jackson
Student:
Partner:
Bank of Montreal
Discipline:
Computer science
Sector:
University:
University of Toronto
Program:
Accelerate
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