Abstract
We consider models for the pricing of foreign exchange derivatives, where the underlying asset volatility as well as the one for the foreign exchange rate are stochastic. Under this framework, singular perturbation methods have been used to derive first-order approximations for European option prices. In this paper, based on a previous result for the calibration and pricing of single underlying options, we derive the second-order approximation pricing formula in the two-dimensional case and we apply it to the pricing of foreign exchange options.
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