Calibration of the Multi-Currency LIBOR Market Model

Pilz, Kay F.; Schlögl, Erik

doi:10.2139/ssrn.1743315

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Calibration of the Multi-Currency LIBOR Market Model

25 Pages Posted: 19 Jan 2011

See all articles by Kay F. Pilz

University of Technology Sydney (UTS), Quantitative Finance Research Centre; University of Cape Town (UCT) - The African Institute of Financial Markets and Risk Management; Faculty of Science, Department of Statistics, University of Johannesburg; Financial Research Network (FIRN)

Date Written: January 19, 2011

Abstract

This paper presents a method for calibrating a multicurrency lognormal LIBOR Market Model to market data of at-the-money caps, swaptions and FX options. By exploiting the fact that multivariate normal distributions are invariant under orthonormal transformations, the calibration problem is decomposed into manageable stages, while maintaining the ability to achieve realistic correlation structures between all modelled market variables.

Keywords: Currency options, LIBOR Market Model, exchange rate risk, interest rate risk

JEL Classification: G13

Suggested Citation: Suggested Citation

Pilz, Kay F. and Schloegl, Erik, Calibration of the Multi-Currency LIBOR Market Model (January 19, 2011). Available at SSRN: https://ssrn.com/abstract=1743315 or http://dx.doi.org/10.2139/ssrn.1743315