I am trying to get a feel for how the street prices exotic currency options (both long and short term). Do exchange rates exhibit similar properties that equites do, i.e. discrete jumps, skew, smile, etc... Say I was to price a 2 year cliquet on the fx rate, do I need stochastic volatility and or jump diffusion to get the price right, or will local vol do fine. I have a feeling that the fx rate does exhibit similar dynamics as equities, but I am not a trader and just getting into the subject. The final model that I am going to create includes multiple currencies and interest rates, so I hope that I don't need to use a second factor for the fx rate process because I already have so many. Also, my options are going to be extremely long term, > 5 years. Any thoughts?-a

I am buying any cliquets that you price with local vol.

Enough said.Thanks fig.

By the way, I just found an excellent paper by Carr and Wu if anyone else has the same questions I did. http://econwpa.wustl.edu/eps/fin/papers ... 409014.pdf "Stochastic Skew in Currency Options" if you can't get the link.-a