Sorry for the information.
Or the EUROGBP is like a portfolio of EUROUSD and GBPUSD, so the underlying
of this option is a portfolio instead of a single asset.
I still prefer the US risk free rate.
This is only my naive opinion.
2009/5/12 RON70
>
> "the price of EUROGBP is in US dollar" : from the specification given in
> CME
> it is in GBP. Please see this :
>
> http://www.cmegroup.com/trading/fx/fx/euro-fx-british-pound_contractSpecs_options.html
>
>
>
> BearXu wrote:
> >
> > 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
> >
> >> 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
> >> >Sent: May 10, 2009 9:53 PM
> >> >To: RON70
> >> >Cc: r-sig-finance@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 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-tp23401986p23401986.html
> >> >> Sent from the Rmetrics mailing list archive at Nabble.com.
> >> >>
> >> >> _______________________________________________
> >> >> R-SIG-Finance@stat.math.ethz.ch mailing list
> >> >> https://stat.ethz.ch/mailman/listinfo/r-sig-finance
> >> >> -- Subscriber-posting only.
> >> >> -- If you want to post, subscribe first.
> >> >>
> >> >
> >> >
> >> >
> >> >--
> >> >Mahesh Krishnan, Ph.D
> >> >
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> >> >
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> --
> View this message in context:
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> Sent from the Rmetrics mailing list archive at Nabble.com.
>
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