Counterexamples for FX Options Interpolations -- Part II
Jherek Healy
TL;DR
This paper investigates how different methods of interpolating foreign exchange option quotes can significantly affect the implied volatilities derived for key strike options.
Contribution
It provides a detailed analysis of the discrepancies caused by various interpolation techniques on FX option implied volatilities.
Findings
Interpolation methods can lead to notable differences in implied volatilities.
Different exact interpolations of broker quotes impact 10Δ and 25Δ Puts and Calls.
Highlights the importance of choosing appropriate interpolation methods in FX options.
Abstract
This follow-up article analyzes the impact of foreign exchange option interpolation on the vanilla option implied volatilities. In particular different exact interpolations of broker quotes may lead to different implied volatilities at the 10 and 25 Puts and Calls.
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Taxonomy
TopicsStochastic processes and financial applications · Capital Investment and Risk Analysis · Credit Risk and Financial Regulations