Re: [Quantlib-users] Basic query on the riskfree rate in Garmankohlagen process

[Jonathan S. <sw...@gm...>]

For EUR/USD the foreign currency is EUR and the domestic currency is USD.
Looks like the code on stackoverflow passed them in the wrong order.

The foreign and domestic currency in each currency pair is determined by
market convention. Iain Clark’s book[1] does a good job of explaining the
conventions in case you haven’t come across it yet.

[1]
https://www.amazon.com/Foreign-Exchange-Option-Pricing-Practitioners/dp/0470683686


2022년 7월 5일 (화) 17:13, Ashish Bansal <ash...@gm...>님이 작성:

> Hi,
>
> I want to know which currency is to be considered domestic and which one
> foreign for the risk-free rates in the following process while pricing the
> FX option:
> *process = ql.GarmanKohlagenProcess(initialValue, foreignRiskFreeTS,
> domesticRiskFreeTS, volTS)*
> source:
> https://quantlib-python-docs.readthedocs.io/en/latest/stochastic_processes.html#garmankohlagenprocess
>
> On the following page on Stack Overflow, the second parameter (USD) is
> written with the name as domestic and the third parameter (EUR) as foreign
> which is the inverse of the above user guide:
>
> *ql.GarmanKohlagenProcess(ql.QuoteHandle(ql.SimpleQuote(1.122)),
> usd_domestic, eur_foreign, volTS*
> source:
> https://stackoverflow.com/questions/66113871/pricing-an-fx-option-using-the-garman-kohlagen-process-in-quantlib-python
>
> Could you please confirm if I have the FX rate as follows then what is the
> correct convention:
> For 1 EUR = 1.22 USD convention
> conv-1: USD = foreign (2nd param) and EUR = domestic (3rd param)
> or
> conv-2:  EUR = foreign (2nd param) and USD = domestic (3rd param)
>
> I suppose, when I put the FX rate in inverse convention, the risk-free
> rates would also be switched.
>
> Thanks in advance.
>
> Regards,
> Ashish
>
>
>
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