Black scholes fx option pricing

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 units. In this post; we will break down the steps to pricing a FX option using a couple different methods.

One is to use the Garman Kohlhagen model 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 option or as a put option.

Foreign exchange option - Wikipedia

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.

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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.

Pricing Model For Forex Options | Saxo Group

To get the same result in USD, we multiple 0. 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 to show that it's always important to consider the units of your inputs as that will determine how to convert them into the units you require.

For details on the math behind these models please see help. Learn more about Resolution's support for foreign exchange derivatives.

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For more information see our pricing plans. Details Put option on GBP, Call option on USD Valuation Date: Dec 24, Maturity Date: January 7, Spot price as of Dec 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 forward price for the currency on the expiry date is 1. Home Privacy Search Site Map Top.