Despite the relatively recent advance in the derivative industry, the
European FX option market uses simple models such as Black (1976) or Garman
and Kohlhagen (1983). This widespread practice hides very important
quantitative effects that could be better explored by using alternative
pricing models such as the one that incorporates the stochastic volatility
features. Understanding and calibrating this type of pricing model
represents a challenge in the current state of art in financial engineering,
specially in emerging markets that are characterized by strong volatilities,
periodic changing regimes and in most case suffering of liquidity, specially
during the crisis. In this sense, this paper shows how to implement the
Hestons Model for the Brazilian FX option market. This approach uses the
volatility matrix provided by a pool of domestic market players. Although
the Hestons Model presents a formal analytical solution it does not require
simulation-, the closed form solutions show a mathematical complexity. Thus,
the main objective of this work is to implement this model in the Brazilian
FX market.
Calibração do modelo de Heston para o mercado brasileiro de opções de
câmbio (FX)