New FX volatility model revolutionizes pricing for global currency options!
The article explores how the volatility of different foreign exchange markets, like Euro/USD, Pound/USD, and Aussie/USD, varies. The Euro/USD market shows a unique U-shaped pattern in volatility. Traditional models may struggle to capture this shape accurately. A new model combining local and stochastic volatility is proposed to better price FX options. This model is found to be a good choice for pricing options in these markets.