Handbook of Exchange Rates

24.3 Market for FX Options

24.3.1 Overview

According to the latest BIS report,¹⁰ average daily turnover in the options market is US$207 billion. This is based on the face amount of options being transacted. This represents only 5% of the total FX daily turnover of around US$4 trillion. At the same time, spot transactions represent US$1.5 trillion. According to multiple sources in investment banks, options generate around 30% of the spot turnover due to delta hedging and gamma adjustments. Actually the turnover in the spot market generated by options can be greater, as the initial delta will be almost 0.5 on average; and then all further gamma trades will create additional flow on a daily basis (Table 24.1).

Table 24.1 BIS Report, Global Foreign Exchange Market Turnover

Another interesting set of numbers that give us a flavor of the market are the amounts outstanding (Table 24.2). You can see that, from 2007 to 2010, the notional amount outstanding went down, while the gross market values went up. The percentage is approximately the average cost of an option. This percentage was almost double what it had been 3 years ago. One reason for this is the volatility—the price of insurance went up following the crisis. Another reason is that the time to maturity of the outstanding options has increased, as investors are paying long-term premium to be hedged for longer, again based on their ...