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

[Ashish B. <ash...@gm...>]

so you are saying it should be passed like this:
For 1 EUR = 1.22 USD:
ql.GarmanKohlagenProcess(ql.QuoteHandle(ql.SimpleQuote(1.22)), EUR_rate,
USD_rate, volTS)

and when rate is 1USD = 0.82 EUR:
ql.GarmanKohlagenProcess(ql.QuoteHandle(ql.SimpleQuote(0.82)), USD_rate,
EUR_rate, volTS)

Please confirm.

Thanks
Ashish Bansal


On Tue, 5 Jul 2022 at 15:16, Jonathan Sweemer <sw...@gm...> wrote:

> 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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>