Corpus ID: 208547874

Pricing FX Options under Intermediate Currency

@article{Maurer2019PricingFO,
  title={Pricing FX Options under Intermediate Currency},
  author={Samuel Maurer and Timothy Sharp and Michael V. Tretyakov},
  journal={arXiv: Mathematical Finance},
  year={2019}
}
We introduce a new pricing mechanism for FX options, which is based on the idea of an intermediate pseudo-currency market. This approach allows us to price options on all FX markets simultaneously under the same risk-neutral measure which ensures consistency of FX option prices across all markets. In particular, it is sufficient to calibrate a model to the volatility smile on the domestic market as, due to the consistency of pricing formulas, the model automatically reproduces the correct smile… Expand

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