Please enable JavaScript.
Coggle requires JavaScript to display documents.
FX Option (Basics (noraml vs lognormal (normal: mode=median=mean
…
FX Option
Basics
Base: Under ccy
Quote: Over ccy
Pips use over (i.e.
GBPUSD GBP is under,
Over is USD, pip is showing is upper)
-
Two action of choices if moving out the strikes (optionality, will effectively become a fwd pos):
- take profit by selling back
- roll the strikes
-
Option price
intrinsic value: value of option if it were exercised today
time value (extriinsic value): the diff between price of option and intrinsic value
so intrinsic value + time value = option value
Pricing Model
Black-Scholes Model
-
Assumption
- Options are European
- Distributions of price is lognormal (so % ch of price (return) is normal) and price does not jump
- int rate and vol are constant (int rate are conti compounded)
- Perfect market (no cost and tax)
N(d) Cumulative density function (Cdf), probability that x<=d
-
-
-
-
-
noraml vs lognormal
-
lognomral: 10% increase in RETURN followed by 10% decrease in RETURN will return to the original position
-
-
In real life, Return is leptokurtosis (more often in belly and tails)
Vanilla
-
Strategy
Synthetic Long: buying put + buying stock:
usually used when your view changed... instead of
closing the option, just do underlying (so usually two step in diff time instead) so to decrease transaction cost
-
-
-
-
-
-
-
Vol
Actual (Historical Vol):
Step1: Collect Price
2: Calculate Return: cal natural log of sequential daily prices
- Cal Std Dev: zero mean is assumed
- Cal Ann Std Dev
-
Seasonality:
- Thur: higher
- 3pm: higher
3: 15th: higher
if there is spot gapping, will be a spike in vol,
shorter window, thinner, higher the spike
Arithmetic vs Exponential Vol
Arith: eq weight: order of returns is unimportant
Exp: recent weight events more weight
Implied vol
-
depends on maturity: term structure
x: time (muturity) (usually ATMS, but can use ATMF, constant delta, ...), y: impplied vol
-
-
-
Butterfly (Fly): nervouness of market=(Volcall+Volput)/2-Volatm
Risk Reversal (RR): skewness (Volcall-Volput)
-
Smile Stickness
Sticky Strike: as spot moves, vol curve remained fixed as a function of strike
Sticky Delta: when spot moves, vol curve remained fixed as a function of Delta
-