i've never come across "driftless delta"i've only ever seen spot delta and forward delta (used for determining strikes of options with >2y maturities)

<t>first of all, you are correct, this will not be physically delivered, it will just cash settle in CHF at a specified rate, which of course as you have pointed out adds CHF risk to this optioni think you're confusing yourself with underlyings. the issue here that you're not addressing properly is ...

<t>TV = sqrt[ (t2*sigma2^2-t1*sigma1^2)/(t2-t1) ], where t1 and t2 are the times to the fixing of the FVA and the expiration of the FVA respectively, and sigma1 and sigma2 are the market implied volatilities of the atm dns or atmf options of maturities t1 and t2 respectively in years... whether the ...

<t>ok ... what are you on about?what does the steep skew and spot vol correlation have to do with a lower fva price? why does an fva in base currency notional have any exposure to spot vol correlation / risk reversal at all? just the fact that the currency pair has a big risk reversal doesn't do it ...

right ok so on points 2 and 3.. these sound to me like an argument to make the price wider, not to skew it one way or the other from TV right?

<t>yeah USDBRL is a totally different animal for a couple reasons (i'm a G10 trader so bear with me).. first, i believe these settle into atmf and not dns right? that would eliminate the premium argument i was making above.. second as you mention the correlation of the interest rate differential and...

<t>hmm not quite sure what you mean.. i think you've misunderstood me.. there is a big difference between JPY notional and JPY premium.if its JPY notional, this does not change the strike but makes the buyer long risk reversal, which should raise the price.. this wont affect TV but will affect price...

the payout is what you specify the notional is. if it's 1 EUR, as is the default for EURUSD digitals, then 1 EUR is the payout. you could have specified 1 USD, in which case the payout would be 1 USD.

<t>I think this is quite clear. It's quite common for traders to look at delta (or other greeks) in terms of USD equivalents. So say you buy 100 AUD of a 50 delta AUDNZD call option, you have a delta of +50 AUDNZD. However, you don't look at your PNL in AUD, you look in USD. The delta in USD equival...

<t>that's not true. inverted curves happen all the time. right now back end eurusd is downward sloping, for example. the formula still works because of the time scaling, it will just output a forward vol less than either of the two vols, intuitively. what wont happen is for vol2 to be so much less t...

<t>You have to think about how you're coming up with a TV. Take your 6m in 9m AUDJPY FVA. You get your TV using 9m and 15m ATM DNS, AUD premium, vols. The reason you use these is because in 9m time, the FVA will settle into a 6m DNS. However, the 15m DNS with AUD premium strike is a good deal furthe...