Archive for category Derivatives

FX Options: relation between premium prices in percentage vs in pips

FX options can be negotiated either in percentage or in pips (price interest points). This illustrates the various equivalences to convert a price in % to pip or vice versa. Main relation rule : Premium in pips = strike / premium in % x 100 Premium in % = premium in pips / strike / […]

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FX Options pricing (Exotic) – European Single Barrier options

Definition Barrier options are part of exotic options. They differ from standard (or vanilla) options by having extra criteria to determining if they can be activated or not / exercised or not. With vanilla options the underlying spot price is compared to the strike price to decide whether we exercise it or not. On top […]

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Practical use of the Delta: Delta neutral management

An FX option position induces a risk, just as a spot or a forward position. A “delta neutral” management consists into fitting an option position with an FX Spot equivalent to compensate changes in risk induced by the option. Example for a seller of a Call FX option: The risk on its position is to get exercised […]

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Introduction to Delta

Delta is one of many indicators that option pricing models are providing (Greeks). It represents the practical level for exercising an option. Consider a call option. During life, before its expiry date: – If the forward price is below the strike price (call out of the money), the option has less than one chance out of two of being […]

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Implied and historical volatility

Volatility is one of the parameters needed to calculate the price of a currency option between its trade date and expiration date. Other parameters provided by the markets are: the spot price of the underlying, interest rates of the two currencies involved. The valuation model used for the European style currency options (vanilla) is Garman-Kohlhagen. […]

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FX Options pricing – Plain Vanilla European model (Part II)

Part II: End of day and online FX options pricing processes This article is the continuation of the part I. Each option contract can have its own pricing method. The implemented model is coded as for all OTC European FX option contracts set in DX.CONTRACT.MASTER:   This “GARMAN.KOHL” code is set in DX.PRICE.SOURCE table with […]

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FX Options pricing – Plain Vanilla European model (Part I)

Part I: Description of FX options pricing basic requirements 1.1 Market data feeds To be able to price FX options, the model (Garman & Kohlhagen) needs market data feeds: FX volatilities by currency pairs, risk-free (zero-coupon) interest rates and FX spot rates. Other parameters (strike, time to maturity, etc…) directly come from deal options to revalue. […]

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FX Options Products

Introduction Options – Definition Options strategies ————————————————————————————- Introduction Derivatives markets or products are named ”Derivatives’ because they are “derived” from another market -respectively product- usually negotiated spot. Derivatives are products based on an underlying which can be a contrat, an equity, an index (,…) negotiated in a spot market. For instance, currency options are ”derivated” […]

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