Tuesday, February 10, 2009

reading FXVol names - simple rules to remember

Confusing rule -- a put on AAA/BBB is same as a call on BBB/AAA !


Simple rule: In the beginning, always treat first ccy as commodity and resist the temptation to treat second ccy as commodity. Even though other people tell you about the equivalence, beware the confusion it causes.

Simple rule: on the smile curve or vol surface, use OTM and ATM instruments only. Don't flip the currency pair.

Simple rule: on the smile curve, you use low low-delta puts and calls, never high-delta instruments, and never flip the pair

Simple rule: option seller is always seller (never becoming buyer) when you convert between an equivalent call and a put. Option seller always collects insurance premium and is always short vega. However, for a RR strategy either counterparty is simultaneously seller+buyer.

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