Foreign Exchange

Abstract

This chapter is devoted to the extension of the framework to multiple economies or currencies. We start by putting a well known cross-currency model into the LGM setting in Section 12.1 and generalizing this to multiple currencies in Section 12.2. We will first assume that we can work with interest rate models in domestic and foreign currencies that are calibrated “in isolation”. We will show then in Section 12.4 how the system is adjusted to take deterministic cross-currency basis into account so that the Monte Carlo framework prices single and cross-currency swaps in all currencies involved consistently.