Please bear with me if my question is old hat, I'm new to this game.In the valuation of European FX OTC options is it market practice to quote the strike and spot rates as adjusted rates?e.g if the unadjusted strike is say cable 1.50 then it is deemed that this is the rate at expiry + spot, therefore, this is a discounted rate. To get the true adjusted strike rate then this would be the strike rate compounded back using the usd discount factor/sterling discount factor mutilplied by the strike rate of 1.50If anyone could give me their views on this then I would be very grateful

I don't know what you mean by the "adjusted" strike and spot rates. Spot is the rate at which you can trade for normal settlement. The strike is the rate at which the option seller agrees to trade at expiry at the option buyer's option. There are no adjustments.I'm not an FX trader, so perhaps I'm misunderstanding something and someone can give you a better answer. But I think you may be imposing some textbook concepts on the market. In general in the market, the rate you are quoted is the rate you pay or receive.

I have traded OTC fx options.There are two ways to trade the plain vanilla fx options. Hedged or unhedged.Unhedged : the plain put or call on the counter currency is traded with spot fx rate being referenced, however, the strike fx rate is the all important contracted rate.Hedged : the option is traded with a corresponding forward fx contract in the amount to make the trade delta neutral (e.g. with a 25 delta put/call option, a forward trade to option delivery date is also traded at approximately 25% of notional of option amount).The forward rate is then calculated off the current spot rate and adjusted by the midmarket forward points to the delivery date.Otherwise, unless it's an exotic option, there are no other "adjusted" rates for OTC fx options.

Thanks for the replies to my question.My question arose from an option valuation system which allows you to configure your reval model either using or not using "spot day discount" i.e. adjusted spot or strike. The model uses the Garmann-Kohlhagen formulae for European options.If you select to use spot day discount then all strike and spot rates, both of which are used in the formula to MTM an FX OTC option, are "adjusted". This adjustment seems to me to assume that the strike rate quoted has been discounted by two days (spot) and therefore, the strike rate as at today needs "grossing" up based on the 2 day disount rates for the two FX currenciesAs an example, assume:today is 14/08/02spot date is 16/08/02spot rate at spot date is 1.50 (usd/gbp)usd discount factor at 16/08/02 is 0.9998gbp discount factor at 16/08/02 is 0.99945then the adjusted spot rate is:(0.9998/0.99945)*1.50 = 1.500525Any more views or experiences of seeing this before??StevenullQuoteText

HI SWL, what are you doing with these calculations? Are you a proprietary trader?I'm pretty new myself, so please take that into account. As far as I know, rates are quoted 'unadjusted' in the market, hence taking into account maturity and delivery. Spot means automatically valuta 2 'bank' working days after the trade. It is common practice since it used to take 2 days to do paperwork in the back office to complete the transaction. Although it could be done within minutes these days, it has remained practice to quote prices for spot rates in the fx market with valuta 2 days after the trade. You can request rates to be quoted valuta today, then you need to apply the forward rate 2 days backwards for the currency pairs' spot rate , i.e. currencies with up-price have to be discounted and currencies who trade with discount on forward have to be up-priced instead. But this would not be called SPOT rate, and the forward desk should take care of the request. But when you refer to Spot in the OTC market, you will likely to deal with the spot desks on maturity.in the OTC option market, the strike refers to the spot rate at maturity, and the spot rate at maturity is the actual rate with delivery in 2 bank working days factored in. I'm not familiar with the option pricing programm, but in practice, the SPOT and OTC market, a trade with valuta 2 bank working days is traded by the spot desks, every other delivery, including today, would be traded in the forward market- and for the OTC options at maturity, spot at maturiy day is used as a reference for the strike. QuoteOriginally posted by: SLWPlease bear with me if my question is old hat, I'm new to this game.In the valuation of European FX OTC options is it market practice to quote the strike and spot rates as adjusted rates?e.g if the unadjusted strike is say cable 1.50 then it is deemed that this is the rate at expiry + spot, therefore, this is a discounted rate. To get the true adjusted strike rate then this would be the strike rate compounded back using the usd discount factor/sterling discount factor mutilplied by the strike rate of 1.50If anyone could give me their views on this then I would be very grateful

Now I understand the reason for confusion a little better -- I think.The problem appears to be caused by reference to spot which is a variable in its definition.Different currencies have different practices for what is defined as spot date. In most currencies it's two days, however, I've seen it range from zero to 3 days. (e.g. Brazilian Reals, Argentine Pesos, Turkish Lira, .... trade spot for 1 business day).It also becomes a little more complicated when you throw in different cross currencies, i.e. instead ofagainst USD to have against EUR or JPY, and business day convention and respective holiday calendars.FX calculator needs to account for differences in spot definitions. And most mark to market systems calibrate off of cash date (today) and therefore need to determine what the cash date rate should begiven the inputted spot date and discount factors in each currency.The long winded answer to your question is: you simply need to be consistant with the rate that you are inputting. If it's market convention for spot of 1 day, then you need to adjust it to the convention in your system.In your example, market quote Aug 14 of 1.5 gbp is for Aug 16 delivery. So no adjustment necessary. If your system expects you to put in Aug 14 delivery rate ( or what is known as cash rate --same day delivery) then you need to make the adjust off the 1.5 rate. --- Just as an aside GBP is refered to as Cable in the market.Also, GBP is quoted Dollars per sterling and the cash rate would be = future date rate*discount factor stirling/discount factor dollarso 1.5*0.99945/0.9998 = 1.499475 the cash date rate for GBP.

Hey, rocketscience, do you have an email address?Kisses!!!