We consider the problem of finding a valid covariance matrix in the FX market given an initial non-PSD estimate of such a matrix. The standard no-arbitrage assumption implies additional linear constraints on such matrices, which automatically makes them singular. As a result, one cannot just...

A number of methods has already been proposed for creating a valid correlation matrix in finance. However, such methods do not normally take into account additional restrictions on matrix elements imposed by specific non-arbitrage conditions in some markets, e.g. foreign exchange (FX). I suggest...