O'Reilly logo

FX Derivatives Trader School by Giles Jewitt

Stay ahead with the world's most comprehensive technology and business learning platform.

With Safari, you learn the way you learn best. Get unlimited access to videos, live online training, learning paths, books, tutorials, and more.

Start Free Trial

No credit card required

Chapter 17FX Derivatives Market Analysis

Traders analyze the FX derivatives market in order to identify relatively cheap and expensive aspects of the volatility surface. This analysis is then used to position trading books and generate trade ideas for clients. The FX derivatives market has many moving parts and there are a correspondingly large number of ways in which it can be investigated.

Calculating Breakevens

The simplest FX derivatives analysis involves combining a short-dated vanilla option payoff with its premium to calculate its breakeven. Assuming the option is left unhedged until maturity, if spot moves beyond the breakeven point, the trade will make money. This breakeven point can be compared with expectations of spot movement to determine whether the option is cheap or expensive.

For a single vanilla option, the premium (expressed in CCY2 pips) is added onto (for a call option) or taken away from (for a put option) the strike level to determine the breakeven. For example, if current USD/JPY spot is 95.00 and the premium on a 3mth 100.00 USD call/JPY put option is 400 JPY pips, the breakeven on the option is 104.00. This is shown in Exhibit 17.1.

c17ex001

Exhibit 17.1 Call option breakeven

As the strike is moved higher, the premium decreases but the breakeven moves further away, as shown in Exhibit 17.2.

Exhibit 17.2 Call option breakevens

For a short-dated ATM straddle, ...

With Safari, you learn the way you learn best. Get unlimited access to videos, live online training, learning paths, books, interactive tutorials, and more.

Start Free Trial

No credit card required