Calibration of implied volatility for the exchange rate for the Chinese Yuan from its derivatives

Revised implied volatility curves and surfaces for the Chinese Yuan (CNY) exchange rate are obtained from market quotations for CNY non-deliverable options by solving an inverse problem of foreign exchange option pricing, which is calculated using a regularization approach in an optimal control framework. To take account of the market expectation for the CNY exchange rate, a stochastic adjusted factor is applied that follows a Vasicek model with parameters fitted from market quotations for CNY non-deliverable forwards. A well-posed numerical scheme is implemented.

► Calibration implied volatilities of CNY exchange rate by quotations of CNY options. ► Calibration is based on a regularization approach in an optimal control framework. ► A stochastic factor is adjusted, which follows a Vasicek model fitted by CNY NDF .► Numerical examples are presented on certain days with the exchanges' behaviour.