FX Options and Smile Risk

Preface

When I first proposed writing a book on FX options, I could not help thinking that the final result would produce in the reader that disappointing, yet typically human, feeling caused by the recognition of what the Qoelet expresses in such a condensed way: “Quod factum est, ipsum est, quod faciendum est: nihil sub sole novum”, which in slightly more modern words, and in accordance with the situation, means “Many books on options have been written in the past and this one is just telling the same old stories everybody knows”. This fear was also sharpened by the fact that some very good books have already been written on the subject, so that just trying to be at the same level would be a titanic task. In this respect, I would like to mention here the excellent book by Uwe Wystup [63], which covers many areas, from pricing to regulation issues.

My scepticism about the likely outcome of my efforts was then partially reduced when, by chance, I read an aphorism of that solitary Colombian thinker (still inexplicably not too much known), Nicolas Davila, in his Escolios a un texto implicito, which stated: “Nobody thinks seriously until he cares about being original”. I started to become aware that actually I did not have to search for new areas to analyse, and that I did not necessarily have to be original about the choice of subjects: “simply”, I had to explore them deeply. Two questions naturally arose in my mind: Do I have the knowledge and expertise to undertake such a thorough ...