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iniesta
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Joined: June 16th, 2010, 11:27 pm

ATMF vs ATM spot

August 20th, 2013, 11:20 am

in rates we often look at ATMF, ie. ATM 3y10y payer is quoted with K=3y10y rate instead of 10y spot rate. why do people choose to view it this way rather than using 10y spot. i also want to ask the same question for equities.
 
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Martinghoul
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ATMF vs ATM spot

August 20th, 2013, 12:32 pm

Because the underlying for the 3y10y payer is the 3y10y fwd rate, rather than the 10y spot. I am pretty sure this is also the case for equities. I imagine the use of spot there is just a matter of convenience and short-hand, rather than anything more complicated. However, I am hardly an expert on equity options.
Last edited by Martinghoul on August 19th, 2013, 10:00 pm, edited 1 time in total.
 
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sladner
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Joined: August 29th, 2011, 3:25 pm

ATMF vs ATM spot

August 20th, 2013, 6:07 pm

in equities, you don't use the forward price as a reference for quoting. a 90% put means strike = 90% of spot. an ATM calendar spread means both strikes are the same (not different to take account of different forward prices). but when thinking about how to describe volatility dynamics, one has to work with ATF rather than spot - for example, describing skew as a function of (forward/spot)
 
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gc
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ATMF vs ATM spot

August 21st, 2013, 7:33 am

I believe that the fundamental difference is whether one uses the BlackScholesMerton or Black76 framework.The formulae are deceptively similar to the point that it is very easy to think as Black76 just as BSM with a cosmetic adjustment, but the concept behind the two models is fundamentally different. I remember reading a very good explanation in the introduction of Rebonato's Libor market model book (the only chapter I read of that book!) and a very good treaty in Rebonato's Volatility and Correlation.In the equity word people probably use BSM, in interest rate Black76 it is necessary to move in the forward measure to solve the problem between a stochastic rate used for the option and a otherwise deterministic rate used for the discounting as it would be if using the BSM framework.
 
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jige
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ATMF vs ATM spot

August 23rd, 2013, 5:03 pm

Sladner , so your saying if im asking a 6M ATM Call for a stock which will release a discrete dividend of about 5% the current spot you actually gonna quote me an ITM call ? (because the ATM spot is way much higher than the ATM Forward and the underlying of a 6M ATM call is the forward and not the spot) Just wondering as it seems quite different to other field (commo, fx).
 
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sladner
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Joined: August 29th, 2011, 3:25 pm

ATMF vs ATM spot

August 26th, 2013, 4:01 pm

atm in equity land just means strike = current spot. so, to be precise, you are asking for and getting a 6m atm call. the verbiage matters depending on the market that you're in...now, this call's strike does happen to be higher than its forward price (so, it would be an ITMF put, not call), but it is what it is.the reason equities are quoted this way is that there is not always agreement about what the forward price should be (future dividend streams are not always necessarily known, especially for longer-dated options). think about microsoft back in the days before they started paying a dividend. while they had never paid one before, option markets made "bets" about a possible div (both timing and magnitude) for quite some time before the div actually came into existence, so it would be difficult to talk about the msft forward price in that context.
 
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jige
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Joined: December 4th, 2011, 4:08 pm

ATMF vs ATM spot

August 26th, 2013, 4:47 pm

Quotethe reason equities are quoted this way is that there is not always agreement about what the forward price should beYou're wrong, I can buy a share in 6M forward time on the futures market whenever I want. The agreement is the future price.Whatever if you say this is standard mkt procedure, still I dont see any reasons.
 
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sladner
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Joined: August 29th, 2011, 3:25 pm

ATMF vs ATM spot

August 28th, 2013, 4:24 pm

there is not a liquid forward market for very many individual equities, my friend. you're welcome for helping you understand something you did not.