FX Option Performance: An Analysis of the Value Delivered by FX Options since the Start of the Market

267 Pages·2015·2.57 MB·English

by  Jessica James

FX
Option
Performance
ForothertitlesintheWileyFinanceseriespleaseseewww.wiley.com/finance
FX
Option
Performance
An Analysis of the Value Delivered by FX
Options Since the Start of the Market
JESSICA JAMES
JONATHAN FULLWOOD
PETER BILLINGTON
Thiseditionfirstpublished2015
©2015JessicaJames,JonathanFullwoodandPeterBillington
Registeredoffice
JohnWiley&SonsLtd,TheAtrium,SouthernGate,Chichester,WestSussex,PO198SQ,United
Kingdom
Fordetailsofourglobaleditorialoffices,forcustomerservicesandforinformationabouthowtoapply
forpermissiontoreusethecopyrightmaterialinthisbookpleasevisitourwebsiteatwww.wiley.com.
Therightoftheauthorstobeidentifiedastheauthorsofthisworkhasbeenassertedinaccordancewith
theCopyright,DesignsandPatentsAct1988.
Allrightsreserved.Nopartofthispublicationmaybereproduced,storedinaretrievalsystem,or
transmitted,inanyformorbyanymeans,electronic,mechanical,photocopying,recordingor
otherwise,exceptaspermittedbytheUKCopyright,DesignsandPatentsAct1988,withouttheprior
permissionofthepublisher.
Wileypublishesinavarietyofprintandelectronicformatsandbyprint-on-demand.Somematerial
includedwithstandardprintversionsofthisbookmaynotbeincludedine-booksorin
print-on-demand.IfthisbookreferstomediasuchasaCDorDVDthatisnotincludedintheversion
youpurchased,youmaydownloadthismaterialathttp://booksupport.wiley.com.Formoreinformation
aboutWileyproducts,visitwww.wiley.com.
Designationsusedbycompaniestodistinguishtheirproductsareoftenclaimedastrademarks.All
brandnamesandproductnamesusedinthisbookaretradenames,servicemarks,trademarksor
registeredtrademarksoftheirrespectiveowners.Thepublisherisnotassociatedwithanyproductor
vendormentionedinthisbook.
LimitofLiability/DisclaimerofWarranty:Whilethepublisherandauthorhaveusedtheirbestefforts
inpreparingthisbook,theymakenorepresentationsorwarrantieswithrespecttotheaccuracyor
completenessofthecontentsofthisbookandspecificallydisclaimanyimpliedwarrantiesof
merchantabilityorfitnessforaparticularpurpose.Itissoldontheunderstandingthatthepublisheris
notengagedinrenderingprofessionalservicesandneitherthepublishernortheauthorshallbeliable
fordamagesarisingherefrom.Ifprofessionaladviceorotherexpertassistanceisrequired,theservices
ofacompetentprofessionalshouldbesought.
LibraryofCongressCataloging-in-PublicationData
James,Jessica,1968–
FXoptionperformance:ananalysisofthevaluedeliveredbyFXoptionssincethestartofthe
market/JessicaJames,JonathanFullwood,PeterBillington.
pagescm.–(Thewileyfinanceseries)
Includesindex.
ISBN978-1-118-79328-2(hardback) 1.Options(Finance) I.Fullwood,Jonathan,1976–
II.Billington,Peter,1948– III.Title.
HG6024.A3J3552015
332.64′53–dc23
2015001988
AcataloguerecordforthisbookisavailablefromtheBritishLibrary.
ISBN978-1-118-79328-2(hbk)ISBN978-1-118-79326-8(ebk)
ISBN978-1-118-79327-5(ebk)ISBN978-1-118-79325-1(ebk)
CoverDesign:Wiley
TopImage:©iStock.com/Maxiphoto
BottomImage:Gears©iStock.com/MarilynNieves
BusinessGraph:©iStock.com/kickimages
CertainfiguresandtablescompiledfromrawdatasourcedfromBloomberg
Setin11/13ptTimesbyAptaraInc.,NewDelhi,India
PrintedinGreatBritainbyTJInternationalLtd,Padstow,Cornwall,UK
JJ:TomysisterAlice
JF:ToLucy
PB:ToGemma,Jamie,FelixandOrson

Contents
AbouttheAuthors xi
CHAPTER1
Introduction 1
1.1 WhyReadThisBook? 1
1.2 ThisBook 3
1.3 WhatIsanFXOption? 3
1.4 MarketParticipants 5
1.4.1 HowHedgersCanUseThisInformation 6
1.4.2 HowInvestorsCanUseThisInformation 7
1.5 HistoryandSizeoftheFXOptionMarket 9
1.6 TheFXOptionTradingDay 14
1.7 Summary 14
References 14
CHAPTER2
TheFXOptionMarket:HowOptionsAreTradedandWhatThatImpliesfor
OptionValue 17
2.1 Introduction 17
2.2 TheBasicsofOptionPricing 18
2.2.1 TheBlack-Scholes-MertonModel 18
2.2.2 TheImpactofVolatility 20
2.2.3 TheImpactofRateDifferentials 21
2.3 HowOptionsAreTraded 22
2.3.1 TwoViewsofVolatility 23
2.3.2 StaticTrading 24
2.3.3 DynamicTrading 24
2.4 AMoreDetailedDiscussionofOptionTrading 26
2.4.1 TheGreeks 26
2.5 Summary 31
References 31
vii
viii CONTENTS
CHAPTER3
ItIsAllAbouttheData 33
3.1 Introduction 33
3.2 TheGoal:ToPriceLotsofOptions! 34
3.3 DefiningaUniverseofCurrencies 34
3.4 TheData 37
3.4.1 PricingModelDataRequirements 38
3.4.2 SourcingtheData 39
3.4.3 CalculationFrequency 40
3.4.4 CurrencyofOptionNotionalAmount 41
3.4.5 SpotMarketValue 42
3.5 Limitations 43
3.6 Summary 45
References 45
CHAPTER4
At-the-Money-Forward(ATMF)Options 47
4.1 WhatAreATMFOptions? 47
4.1.1 HowAreATMFOptionsUsedandTraded? 47
4.1.2 WhatIsthe‘Fair’PriceforanATMFOption? 48
4.2 HowMightMispricingsArise? 50
4.2.1 CantheForwardRateBeonAverageWrong? 51
4.2.2 CantheImpliedVolatilityBeonAverageWrong? 52
4.2.3 SimpleExamplewithUSDJPY 53
4.3 ResultsforStraddlesforAllCurrencyPairs 55
4.3.1 DiscussionofResultsforStraddles 57
4.3.2 ABreakdownoftheResultsbyCurrencyPair 62
4.3.3 DrillingDowntoDifferentTimePeriods 62
4.3.4 ComparisonofPutandCallOptions 64
4.4 HaveWeFoundaTradingStrategy? 75
4.5 SummaryofResults 76
References 76
CHAPTER5
Out-of-the-Money(OTM)Options:DoSupposedly‘Cheap’OTMOptionsOffer
GoodValue? 77
5.1 Introduction 77
5.2 PriceversusValue 78
5.3 TheImpliedVolatilitySurface 79
5.4 WhyDoVolatilitySurfacesLookLikeTheyDo? 80
5.4.1 EquityIndices 80
5.4.2 ForeignExchangeMarkets 83