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

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

The first one looks correct, but not sure about the second one. I would
recommend sticking with the market convention quote and avoiding inverted
quotes if possible.

2022년 7월 5일 (화) 20:15, Ashish Bansal <ash...@gm...>님이 작성:

> 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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>>