FX Vanilla Pricing and Smile Calibration

16 Pages Posted: 26 Mar 2020

Date Written: January 31, 2020

Abstract

The first part of this document is dedicated to the pricing of undiscounted Vanilla Options: we compute the price and sensitivities of Calls and Puts, and highlight the different FX Delta conventions. The most important application of specific FX market conventions (and particularly Deltas conventions) is the FX smile construction. Indeed, the way the smile is described in forex market radically differs from other asset classes (equity, commodity...), requiring a specific procedure to recover the smile as a function of strike. In the second part of this document, we present two different approaches for the construction of one smile maturity slice. We apply both approaches to the calibration of UsdJpy 6 Months maturity smile and discuss the results.

Keywords: Fx Conventions, Market Strangle, Fx Smile Calibration, SVI volatility

JEL Classification: G13

Suggested Citation

Garrivier, Alexandre, FX Vanilla Pricing and Smile Calibration (January 31, 2020). Available at SSRN: https://ssrn.com/abstract=3546921 or http://dx.doi.org/10.2139/ssrn.3546921

Alexandre Garrivier (Contact Author)

Acanthus Solutions ( email )

France

HOME PAGE: http://www.acanthussol.com

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