USD JPY FX options convention.

All contents and information presented here in optiontradingpedia. You must log in or sign up to reply here. The price of an option, otherwise known as the premium, has two basic components: In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. The Saxo Bank Group entities each provide execution-only service and access to Tradingfloor. The portion of an option's premium that is attributable to the I am not sure to understand the difference between smile butterfly and market butterfly:

FX Option strikes from ATM, RR, BF quotes up vote 2 down vote favorite I am trying to replicate the results in Consistent Pricing of FX Options, A. Castagna and F. Mercurio.

Your Answer

Yes, for smile butterfly. The other is the market butterfly, which is more complicated, and you can check the two references I listed if you are interested in. I found the paper by Uwe Wystup, I will have a look at it soon. I am not sure to understand the difference between smile butterfly and market butterfly: Also, you said in your answer that my "confusion is caused by the misuse of notations".

Why did you mean by that? The strangle in your equation is actually the butterfly, that is a misuse of notation. For the market butterfly, it is hard to explain in short, but the book and paper should have some explanations. At the money ATM is a situation where an option's strike price is identical to the price of the underlying security.

Both call and put options can be simultaneously ATM. Options trading activity tends to be high when options are ATM. OTM means the option has no intrinsic value. The intrinsic value for a call option is calculated by subtracting the strike price from the underlying security's current price. The intrinsic value for a put option is calculated by subtracting the underlying asset's current price from its strike price.

The term "near the money" is sometimes used to describe an option that is within 50 cents of being at the money. The call option is said to be near the money. An option's price is made up of intrinsic and extrinsic value.

Logically, a rational buyer would not sell Japanese Yen buy US Dollar at a rate lower higher than the market rate. Convention wise, the exchange rates would need to be inverted first before application to the call option formula. If the exchange rate is expressed as the number of Japanese Yen per US Dollar, the rates will need to be inverted before application in the put formulae. If the exchange rate is expressed as the number of US Dollar per Japanese Yen, the rates can be used as is.

For a put option on USD see example 3: If the exchange rate is expressed as the number of Japanese Yen per US Dollar, the rates will need to be used as is in the put formulae. If the exchange rate is expressed as the number of US Dollar per Japanese Yen, the rates will need to be inverted before application in the formulae. For an equivalent call option on JPY see example 4: If the exchange rate is expressed as the number of Japanese Yen per US Dollar, the rates will need to be inverted before application in the call formulae.

Currency convention and risk free rates After determining the appropriate currency convention to use in the option pricing formula, another point of confusion is with regard to the risk free rates. This is true for examples 1 and 3 below. When the currency convention is inverted in the call and put formula, i. Calculating option premiums After calculating the premium a common confusion is wrt the currency in which the premium is expressed.

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Feb 26,  · Can someone explain to me the differences between an ATM straddle vs. a delta neutral straddle. What I am trying to compare is this: Say a stock. The symmetries of the foreign exchange market are the key feature that distinguishes this market from all others. We discuss many relationships for pricing of options based on symmetry, apply them to exotic options, and outline the basic quotation conventions in the foreign exchange (FX) options market. The strangle vol defined in your formula \begin{align*} Strangle(∆) = [Call Vol(∆) + Put Vol(∆)] - ATM Vol \end{align*} is the smile butterfly volatility. Then you have the volatility quote. Your confusion is caused by the misuse of notations.