FX Modelling: The Effect of Changing Base Currency on Model Parameters
Document ID: 2008-930 (previously 2008/007)
Published on: 31st August 2008
Author: Steven Morrison
In the ESG, the user specifies a "base currency". This base currency serves as a reference for modelled exchange rates: we model the number of units of each currency per unit of this base according to our specified currency model and calibration parameters. However, the user can change base currency to be one of any of their modelled currencies. Since modelled exchange rates are then referenced to another base, we need to know how to define calibration parameters which are consistent with our original parameters. This note describes the constraints that are placed on currency model parameters to ensure that the model structure is unaffected by change of base currency, and the relationship between calibration parameters when we change base currency.
