e are modelling the quantities
and
.
The
is dollar price of a foreign currency (exchange rate), see the section
(
Currency exchange
). The
is intensity of sovereign default pertaining to the foreign currency. We use
the following equations under the risk neutral
measure.
where the
are stochastic processes,
are standard Brownian motions under the risk neutral measure,
are constant parameters,
is the random jump magnitude and
is the martingale normalization constant.
The
and
are stochastic riskless rates of accrual on dollar and foreign MMAs. We will
also use the notations
,
.
These processes are determined by the term structure of bond
prices
The
is modelled as a normal variable
.
The
is a Poisson process, see the section
(
Poisson process
).
The
are subsequently assumed to be 0.
