[R-SIG-Finance] [R-sig-finance] Domestic risk free rate in FXoption
davidr at rhotrading.com
davidr at rhotrading.com
Tue May 12 16:24:19 CEST 2009
NO, the price is in GBP per EUR.
Look at http://www.cmegroup.com/rulebook/CME/III/300/301A/301A.pdf.
Please check your facts before posting.
-- David
-----Original Message-----
From: r-sig-finance-bounces at stat.math.ethz.ch
[mailto:r-sig-finance-bounces at stat.math.ethz.ch] On Behalf Of BearXu
Sent: Tuesday, May 12, 2009 8:53 AM
To: Kris
Cc: r-sig-finance at stat.math.ethz.ch
Subject: Re: [R-SIG-Finance] [R-sig-finance] Domestic risk free rate in
FXoption
In my opinion, the risk free rate may still be the US risk free rate
because
the price of EUROGBP is in US dollar.
But the derivative is changed in terms of its underlying, so whether the
Model of EUROGBP is Brown Motion or not will affect your price formula
much.
2009/5/12 Kris <kriskumar at earthlink.net>
> To add my two cents to this.. Black-76 formula is really Black-scholes
with
> the substitution F=S*exp((r-q)T) and is the formula used to price
options
> in currency land on options on forwards in general. The black-76
formula
> gives you a value in term pips so in the case of EURGBP the value that
comes
> out of the formula is in GBP pips. In order to convert this as a % of
EUR
> notional you divide by Spot. If you are dealing with a GBP notional
then you
> divide the result from the formula by strike to get this as a % of GBP
> notional. Typical quoting convention is to quote as a % of BASE (EUR)
> notional.
>
> In general it is useful to think of the equivalence to stocks when IBM
is
> quoted as 102$ it is really IBMUSD => the amount of USD you need for
one
> unit of IBM. So here IBM is the base or foreign ASSET and USD is the
TERM or
> domestic asset in whose units the price is quoted. So when you price
an
> option on IBM the value you get is in term (USD) units
>
>
> Hope this helps,
>
> Cheers
> Krishna
>
> -----Original Message-----
> >From: Mahesh Krishnan <heshriti at gmail.com>
> >Sent: May 10, 2009 9:53 PM
> >To: RON70 <ron_michael70 at yahoo.com>
> >Cc: r-sig-finance at stat.math.ethz.ch
> >Subject: Re: [R-SIG-Finance] [R-sig-finance] Domestic risk free rate
in FX
> option
> >
> >Ron,
> >
> >Ultimately, currency options calculations depend on what you take as
> >numeraire- the domestic currency, and what you take as the foreign
> currency.
> >In the case of CME, EUR/GBP is quoted as pounds per euro, i.e. the
> domestic
> >currency is pounds and foreign currency is euro.
> >
> >So if you were to price options on currencies using standard Merton's
> stock
> >formula, you use the risk free rate of UK as domestic, and risk free
rate
> of
> >Euro zone as your "dividend yield".
> >
> >To my knowledge, CME only has options on futures, not spot currency.
And
> if
> >you are trying to price that, you basically plug in the risk free
rate of
> UK
> >in the futures-options model, and you get the option premium in
pounds.
> You
> >need to verify that CME option price is quoted it in pounds, I
beleive it
> >does.
> >
> >Mahesh
> >
> >
> >
> >On Wed, May 6, 2009 at 1:12 AM, RON70 <ron_michael70 at yahoo.com>
wrote:
> >
> >>
> >> In CME, option on forex is traded on EUR/GBP. If I want to price
this
> >> option
> >> using some pricing formula then as Domestic risk free interest rate
what
> >> should I take? Shouldn't risk free rate in UK be appropriate? I am
> asking
> >> this because as CME is in US, domestic currency is USD. Your
suggestion
> >> appreciated.
> >> --
> >> View this message in context:
> >>
>
http://www.nabble.com/Domestic-risk-free-rate-in-FX-option-tp23401986p23
401986.html
> >> Sent from the Rmetrics mailing list archive at Nabble.com.
> >>
> >> _______________________________________________
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> >>
> >
> >
> >
> >--
> >Mahesh Krishnan, Ph.D
> >
> > [[alternative HTML version deleted]]
> >
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