Foreign Exchange Options Workshop
MathFinance is organizing an FX Workshop on 17-18 of June 2010 in Frankfurt. The covered topics include
- Cross Smile Building and the Pricing of Options on Several FX Spot Rates
- Numerical methods for second generation FX options - Lookbacks, Asian options, Accruals
- The FX Volatility Smile
The parameter “a” in the Simplified Parabolic Formula
The implementation of the simplified parabolic formula has a subtle issue regarding the parameter a which is defined as follows:
In case of the non-premium adjusted version, this is straightforward as this parameter is either the foreign discount factor or 1.0. However, for the premium adjusted spot version the parameter a reduces to
Strike Delta Conversion in C++
The following discussion is based on the C++ code implemented in FxTests. The code is a contribution to QuantLib, the open source library for quantitative finance applications. The code is likely to be added in one of the next releases.
When do we need to adjust for the premium?
In the previously discussed working paper, we provide a reference to the following table of volatility quoting conventions for different currency pairs.
FX Quoting Conventions
| Currency Pair | Premium Currency | Convention |
|---|---|---|
| EUR-USD | USD | regular |
| USD-JPY | USD | premium-adjusted |
| EUR-JPY | EUR | premium-adjusted |
| USD-CHF | USD | premium-adjusted |
| EUR-CHF | EUR | premium-adjusted |
| GBP-USD | USD | regular |
| EUR-GBP | EUR | premium-adjusted |
Strike-Delta Conversion
The first post discusses issues occurring in the calculation of strikes from a given delta and volatility. An introduction to the topic is given in our working paper FX Volatility Smile Construction . There are 4 types of Deltas in the FX markets:
- Spot Delta
- Forward Delta
