Handbook of Exchange Rates

24.6 Acknowledgment

I would like to thank Jessica James and Stephane Knauf for this opportunity, and also John Quayle for useful discussions about FX options market at his trading desk, Bella Noyen and Diana Ples for help in shaping this document to a proper readable form.

Notes

¹See Filippo Cesarano “Monetary Theory and Bretton woods: The construction of an International Monetary Order” (Cesarano, 2006).

² is the rough calculation of the cost of ATMF (At-the-money-forward) option with maturity t as a percentage of the strike price. It can be derived from the Black–Scholes formulae when the strike is equal to the forward price and then divided by strike.

³See Black and Scholes (1973).

⁴The law-of-one-price in the context of the Black–Scholes derivation means that the price of an option derived as an expected value of payoffs and the price of the option derived as the cost of hedging the claim is the same.

⁵See Hakansson (1979).

⁶Eric Bouye “Portfolio Insurance: A Short Introduction” (Bouyé, 2009).

⁷P. Carr, R Jarrow Stop-Loss Start-Gain paradox (Carr and Jarrow, 1990).

⁸Rebonatto, Volatility and correlation (Rebonatto, 2004).

⁹See “Contract paying future variance along the strike” in “Toward a Theory of volatility trading” by Carr and Madan (1998).

¹⁰Triennial Central Bank Survey, Report on global FX market activity in 2010.

¹¹The best way to hedge an option is to offset it with ...