How To Use FX Options In Forex Trading
All textual content on ForexBrokerz. FX options are also available through regulated exchanges which are options on FX futures, in which case it is simply a call or a put.
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As in the Black—Scholes model for stock options and the Black model for certain interest rate options , the value of a European option on an FX rate is typically calculated by assuming that the rate follows a log-normal process. In Garman and Kohlhagen extended the Black—Scholes model to cope with the presence of two interest rates one for each currency. The results are also in the same units and to be meaningful need to be converted into one of the currencies.
A wide range of techniques are in use for calculating the options risk exposure, or Greeks as for example the Vanna-Volga method. Although the option prices produced by every model agree with Garman—Kohlhagen , risk numbers can vary significantly depending on the assumptions used for the properties of spot price movements, volatility surface and interest rate curves.
After Garman—Kohlhagen, the most common models are SABR and local volatility [ citation needed ] , although when agreeing risk numbers with a counterparty e. From Wikipedia, the free encyclopedia.
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