The Main Risks of an FX Options Portfolio, Some Untimely Considerations of an Option Trader

Abstract:     
In this document we study the risks of an FX options portfolio; we will focus on which, we think, are the main sources of risk. Besides, we analyze also the relationships between the underlying assets' price and the (possibly stochastic) volatility. Some practical suggestions will be proposed to calculate the total (combined asset's price-volatility) VAR of a portfolio, taking into account the smile and the skew of the volatility matrix by means of an Uncertain Volatility Model.

Number of Pages in PDF File: 19

Keywords: FX, option, stochastic volatility, uncertain volatiltiy, smile, VAR

JEL Classification: G13

working papers series