Help: modeling foreign exchange rate

[featips]

Hi,

I already finished modeling short rates of USD and GBP using Hull-WHite model. Now I need to model exchange rate between USD and GBP. Anyone can give me some suggestions about this? such as recommending some good papers, books, published models.......

Thanks a lot.

 

[parisjohn]

Hi
you try to make an hybrid model
the first model to test in a simple brownian geometric on Fx
In this case with stochastic rates you can easily find closes form formula for european option. To price European option it's the simple BS formula with a different vol (with a simple Ito formula you will find this vol)
After this step you can try CEV model on fx diffusion (to match two moment of the skew instead of one), for that go to http://www.quant-press.com/Hybrid_Fx.php you Will fin an interesting paper of V.piterbarg for hybrid model to price prdc product
If you need other details don't hesitate
Thx
J

 

[featips]

Thank you so much, parisjohn. Your input is very very helpful!