Options on currency can be somewhat confusing to price; particularly to someone who isn't used to the terminology of the market, particularly with the valuation. In this post; we will break down the steps to pricing a FX option using valuation couple different methods. One is to use the Garman Kohlhagen options which is an extension of the Black Scholes models for FX and the other is to use Black '76 and price the option as an option on a future. We can also price this option either as a call options or as a put option. We're assuming you have an option pricer to do these calculations. First, we'll look at the Put option. The current spot price of the currency is 1. We now put the inputs above into our option pricer. We're using a Gereralized Black Scholes pricer, which is the same as Garhman Kohlhagen when used with FX inputs. Our result is 0. So if we multiple this by our notional in GBP we get our result in USD as the GBP units cancel out. Now let's run the same example as a call option. To get the same result in USD, we multiple options. Note in the inputs to our pricer, we are now using the USD rate as domestic and GBP as the foreign. The key point of these examples is options show that it's always important to consider the units of your inputs as that will determine how to convert them into options units you require. For details on the math behind these models please see help. Learn more about Resolution's support for foreign exchange derivatives. For more information valuation our pricing plans. Details Put option on GBP, Call option on USD Valuation Date: Dec 24, Maturity Date: Valuation 7, Spot price as of Valuation FX Option on Future example Our next example is to price the same option as an option on a future using the Black '76 model. Our valuation price options the currency on the expiry date is 1. Home Privacy Search Site Map Top.
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