Modeling foreign exchange interest rate hybrid financial derivatives under a multicurrencymodel with stochastic volatility

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:

Dr. Ken Jackson

Student:

Duy Minh Dang

Partner:

Bank of Montreal

Discipline:

Computer science

Sector:

Finance, insurance and business

University:

University of Toronto