REUTERS 3000 XTRA University of Hong Kong Trading Workshop David Lo Class 4 Treasury Workshop II FX Option Markets

REUTERS 3000 XTRA What is OPTION? Buy USD agst CHF Guarantee 1 month Nominal USD 1 mio Amount Buy a House Guarantee 1 month $ 1,200,000 Quantity 1 House

REUTERS 3000 XTRA Options The right, but not the obligation, to buy or sell a predetermined amount of underlying asset against a fixed price until a fixed, future date

REUTERS 3000 XTRA Call & Put Options - Vanilla options “Right to SELL” PUT Option “Right to BUY” CALL Option USD Call / JPY Put  Right to buy USD USD Put / JPY Call  Right to sell USD

REUTERS 3000 XTRA Currency (FX) Option A currency option is a contract where the option buyer pays a premium to the option writer to obtain the right, but not the obligation, to buy (call) or sell (put) a specified amount of foreign currency (or a currency futures contract) at an agreed exchange rate, on or before a specified future date. How to price the FX Option? >Implied volatility is the volatility which, if input into the relevant option pricing model, will give an option price equal to the current market premium, i.e., the level of volatility that buyers and sellers seem to have accounted for in the current market price. Option greeks measure the sensitivity of the price of an option to changes in key variables. Delta, gamma, theta, vega and rho are all examples of option greeks.

REUTERS 3000 XTRA Volatilities Pages - FXVOLEURVOLGBPJPYVOL

REUTERS 3000 XTRA Exotic Options Single barrier options - single barrier option types: knock-in knock-up-and-in knock-down-and-out knock-out knock-up-and-out knock-down-and-out window-knock-in window-knock-up and in with an early end date or a forward start date window-knock-down and in with an early end date or a forward start date window-knock-out window-knock-up-and-out window-knock-down-and-out knock-out-with-rebate

REUTERS 3000 XTRA Double barriers & binary options Average or asian options Lookback options Compound options Premium Deposit / Structuring Notes Exotic Options

REUTERS 3000 XTRA Currency Option Model

REUTERS 3000 XTRA Currency Options Models The Currency Options worksheet allows real time pricing of vanilla currency options. A separate worksheet exists for FX Exotic options. The calculations available on this worksheet include swap points for cross currency deals together with deposit rates for the two currencies. The worksheet allows the simultaneous pricing and analysis of up to nine separate options. Both real time and user amended pricing is available. The Currency Options model prices vanilla FX options. Features Using this model you can: Obtain real time pricing of Vanilla options. Use the Black and Scholes calculation model. Benefits Fully flexible vanilla option pricing. Portfolio available for 9 different strikes.

REUTERS 3000 XTRA FX Exotic Option Model

REUTERS 3000 XTRA FX Exotic Options FX Exotic Options enables you to calculate foreign exchange currency options. You enter the standard terms of the option, and the model retrieves realtime pricing information, including strike. The model calculates the premium, implied volatility and sensitivities. Features The model calculates the following data for each option type: premium in four way: in FX points, in base or quote currency percentage of the spot rate, percentage of the strike implied volatility for the premium calculates the sensitivities of the option for both the bid and ask side: Delta,Gamma, Rho, Theta, Vega compare implied volatility from a known premium against the market quoted realtime volatility hedge your option using sensitivities

REUTERS 3000 XTRA How to Price the FX Option? Adfin Function : =OpPremium( )

REUTERS 3000 XTRA VOLSURFACE (SMILE CURVE)

REUTERS 3000 XTRA

Q & A