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 > >> > > >> > [[alternative HTML version deleted]] > >> > > >> >_______________________________________________ > >> >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. > >> > >> _______________________________________________ > >> 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. > >> > > > > [[alternative HTML version deleted]] > > > > _______________________________________________ > > 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. > > > > > > -- > View this message in context: > http://www.nabble.com/Re%3A--R-sig-finance--Domestic-risk-free-rate-in-FX%09option-tp23494513p23503701.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. > [[alternative HTML version deleted]]