NO, the price is in GBP per EUR.
Look at http://www.cmegroup.com/rulebook/CME/III/300/301A/301A.pdf.
Please check your facts before posting.
-- David
-----Original Message-----
From: r-sig-finance-bounces at stat.math.ethz.ch
[mailto:r-sig-finance-bounces at stat.math.ethz.ch] On Behalf Of BearXu
Sent: Tuesday, May 12, 2009 8:53 AM
To: Kris
Cc: r-sig-finance at stat.math.ethz.ch
Subject: Re: [R-SIG-Finance] [R-sig-finance] Domestic risk free rate in
FXoption
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 at 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 at gmail.com>
Sent: May 10, 2009 9:53 PM
To: RON70 <ron_michael70 at yahoo.com>
Cc: r-sig-finance at 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 at 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
Sent from the Rmetrics mailing list archive at Nabble.com.
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