Heston's model (1993) presents a way to get a
closed-form solution for derivatives pricing when the volatility of the
underlying is stochastic. We explore a similar approach by implementing
a model that retains most of Heston's feature but is more flexible in
depicting the overall volatility. Calibration of the model is
performed, according to the results, both spot return distributions and
plain vanilla options pricing for exchange rates derivatives are
computed. Finally we deal with the issue of establishing which options,
among the ones currently traded in the exchange rate market, are to be
used in a model capable of pricing non-standard derivatives.
