An Fx Options model that incorporates 25-delta Strangles and 25-delta Risk Reversals

Vaidyanathan, K (2012) An Fx Options model that incorporates 25-delta Strangles and 25-delta Risk Reversals. International Journal of Financial Markets and Derivatives, 3 (1). pp. 20-35.

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Abstract

The paper suggests a new class of models (Q-Phi) to capture the information that the foreign exchange options market provides through the 25-delta strangles and 25-delta risk reversals. The model is able to capture the stochastic movements of a full strike structure of implied volatilities. We argue that extracting information through this model and pricing path-dependent and non-benchmark strike options is a better methodology than using a constant implied volatility. The model can be used to price exotic options and hedge them robustly with benchmark European options. It is easy to calibrate and the model parameters lend themselves to intuitive interpretation by a trader managing an Fx options book.

Affiliation: Indian School of Business
ISB Creators:
ISB CreatorsORCiD
Vaidyanathan, KUNSPECIFIED
Item Type: Article
Additional Information: The research paper was published by the author with the affiliation of CEO Quantum Phinance, in Mumbai.
Uncontrolled Keywords: Foreign exchange, Stochastic, 25-delta
Subjects: Finance
Depositing User: Ilayaraja M
Date Deposited: 21 Jun 2019 21:06
Last Modified: 21 Jun 2019 21:06
URI: http://eprints.exchange.isb.edu/id/eprint/1164
Publisher URL: https://dx.doi.org/10.1504/IJFMD.2012.053324
Publisher OA policy: http://sherpa.ac.uk/romeo/issn/1756-7130/
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