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@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@gmail.com>
> >Sent: May 10, 2009 9:53 PM
> >To: RON70 <ron_michael70@yahoo.com>
> >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 <ron_michael70@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-tp23401986p23401986.html
> >> Sent from the Rmetrics mailing list archive at Nabble.com.
> >>
> >> _______________________________________________
> >> R-SIG-Finance@stat.math.ethz.ch mailing list
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> >>
> >
> >
> >
> >--
> >Mahesh Krishnan, Ph.D
> >
> >       [[alternative HTML version deleted]]
> >
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