Fx options vol surface - Pricing | Saxo Group

Presumably if you calculate a price using your favoured model, you could work out what implied vol was needed in the common market's model to get you the same price and quote that?

FX Options and Smile Risk

For quoting purposes, pretty much everyone is using the same model, thus, as long as you fx options vol surface identical parameters everyone should arrive at an identical price.

But I cannot stress enough of how little importance the price is.

Its just the currency which you use to pay for the volatility you buy and sell in the market, never the other way around. In addition to OTC options, there exist a few other markets where quoting conventions fx options vol surface opitons terms of a standard model rather than on true price.

And for exchange-traded contracts, we have eurodollar futures which are quoted as an affine transformation of LIBOR. It highlights the distinction between quoting assets and the settlement of a trade in such asset.

You are referring to implied volatility, more specifically, Black-Scholes implied volatility. I really doubt that market participants use the BS model only because of its unrealistic assumptions. Sorry, that was not my point.

Freddy gave a much better explanation, its about simplifying the set of parameters you are agreeing upon which reduces complexity. The BS-Model is common knowledge, and everybody knows how it works. You fx options vol surface simply translate back and forth between prices and BS-IVs and if you want to use your own model, just use that.

Your specific assumptions you mention proprietary valuation models do not matter here. Sign up or log in Sign up using Google. Sign up using Facebook.

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