Calculating Option Price in Your Head
07 Dec 2018
We know that in Black Scholes a Call option has price
For an ATMF, at-the-money forward, option, , thus
Now comes the approximation
We know , it’s time to calculate the below formula in your head
From Put-Call Parity, we have
To make your calculation even faster, here is the table of ,
Forex options premium are often paid in asset currency, which means the formula can further be simplied to
Forex options prices are often quoted in percentage of asset currency, i.e.
where is volatility in percentage.
Q: USDJPY 3m ATM vol is quoted at 7%, what is the premium?
So the premium is 1.4% per USD, e.g., for a 3m Call option to buy 100 mio USD and sell JPY at ATM strike, the premium is roughly 1.4 mio USD. Nb we ignored the small difference between ATM and ATMF strikes.
Til next time,
Jianfeng at 22:34