Counterexamples for FX Options Interpolations -- Part I
By: Jherek Healy
Potential Business Impact:
Fixes problems when trading money options.
This article provides a list of counterexamples, where some of the popular fx option interpolations break down. Interpolation of FX option prices (or equivalently volatilities), is key to risk-manage not only vanilla FX option books, but also more exotic derivatives which are typically valued with local volatility or local stochastic volatilility models.
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