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

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

Will try to use the first convention for EUR/USD. Users can enter a trade
in any direction for other currency pairs. So need to be clear about it.

Thanks a lot. Appreciate it.

Regards
Ashish

On Tue, 5 Jul 2022 at 16:55, Jonathan Sweemer <sw...@gm...> wrote:

> 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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>>>