We compare the ability of two popular option pricing models (Haull and White, and Heston) to produce volatility patterns compatible with those observed on foreign exchange option markets. Using Heston’s pricing and hedging formulas brings about a significant improvement on Garman-Kholhagen’s classical model.
GESSER, V. et PONCET, P. (1996). Volatility Patterns : Theory and Evidence from the Foreign Exchange Option Market. ESSEC Business School.