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A Brief Comparison of SABR and Heston for FX Option Volatility

Article Quant Q&A · Author: Sanjay
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Summary

The document asks for a summary of the advantages and disadvantages of using SABR to price foreign exchange options. The response directs readers to a prior discussion of volatility-surface approaches and to a master’s thesis about SABR, but it does not reproduce their analysis.

Its only explicit comparison says SABR assumes a lognormal distribution, while Heston is characterized as assuming a normal distribution. That is presented as the respondent’s understanding and is not developed with equations, pricing examples, calibration evidence, or a discussion of trade-offs. The document therefore offers a narrow model-comparison point and references for further reading, rather than a balanced assessment of SABR’s strengths and limitations in FX markets.

Key ideas

  • The document concerns SABR’s use for pricing FX options and asks about its advantages and disadvantages.
  • The response contrasts SABR’s lognormal distribution assumption with a stated normal assumption for Heston.
  • It points to an earlier volatility-surface comparison and a thesis as further reading.
  • No evidence or detailed assessment of the models’ trade-offs is included.

Tags

ForexOptionsDerivatives pricingVolatility
Full text
# SABR in FX market: Advantages / disadvantages


# SABR in FX market: Advantages / disadvantages












I would like to know if someone could provide a summarized view of the advantages and disadvantages of the SABR model used to price FX options?

## Answer by user18663 (score 3, accepted)

https://quant.stackexchange.com/a/28439

Here you can refer to the previously asked question regarding the advantages and disadvatanges of the volatility surface:- What are the advantages/disadvantages of these approaches to deal with volatility surface?

To my knowledge, the main advantage of using SABR in comparison to other models like Heston is that, SABR assumes lognormal distribution whereas heston assumes normal distribution.

You can also refer to the below article:-

http://dspace.library.uu.nl/bitstream/handle/1874/204290/VlamingGeeskeMaster,SABRmodel.pdf?sequence=1

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.