# On the consistency of jump-diffusion dynamics for FX rates under inversion

## TL;DR

This paper examines the conditions under which jump-diffusion models for FX rates remain consistent when inverted, calibrating models to market data and analyzing jump structures to ensure reciprocal dynamics are maintained.

## Contribution

It introduces a framework for ensuring the consistency of jump-diffusion FX models under inversion, including calibration procedures and jump distribution conditions.

## Key findings

- Consistency holds automatically with constant jump sizes.
- Different jump size distributions require specific conditions for consistency.
- A general class of admissible jump size densities is identified.

## Abstract

In this note we investigate the consistency under inversion of jump diffusion processes in the Foreign Exchange (FX) market. In other terms, if the EUR/USD FX rate follows a given type of dynamics, under which conditions will USD/EUR follow the same type of dynamics? In order to give a numerical description of this property, we first calibrate a Heston model and a SABR model to market data, plotting their smiles together with the smiles of the reciprocal processes. Secondly, we determine a suitable local volatility structure ensuring consistency. We subsequently introduce jumps and analyze both constant jump size (Poisson process) and random jump size (compound Poisson process). In the first scenario, we find that consistency is automatically satisfied, for the jump size of the inverted process is a constant as well. The second case is more delicate, since we need to make sure that the distribution of jumps in the domestic measure is the same as the distribution of jumps in the foreign measure. We determine a fairly general class of admissible densities for the jump size in the domestic measure satisfying the condition.