Application of SABR Model to Strategy of Accumulation of Reserves of Central Bank in México

Guillermo Sierra Juárez
(Universidad de Guadalajara, CUCEA, Departamento de Métodos Cuantitativos, Jalisco, Guadalajara México)

Abstract: The purpose of this paper is to review and to calibrate the SABR volatility model in order to estimate the volatility of foreign currency (US dollar) in the case of Mexican market and applied the model to the valuation of the option premium (Oc) specifically for the case of international reserves accumulation of the Central Bank on Mexico. It was found that the estimation of volatility and the premium Oc when the historical and implied volatilities are used have different estimation respect the SABR volatility case, principally when forward price is not the same from strike price.

Key words: SABR; volatility; international reserves; differential geometry

JEL codes: C61, G10, G12