FX volatility surface day-count market convention?

betonmarkets · July 5th, 2011, 7:32 am

FX implied vol surfaces are typically quoted with the following maturities: ON 1W 2W 1M 2M 3M etc.Let's assume that the cut-off times are 10am New York time.My question is: assume we are Monday at 4am New York time and that I am pricing an ON option. What should I use as a time to expiry? 24 hours or 30 hours?If I am pricing an option expiring on the following Monday, should I use a time to expiry of 7 days, or 7 days+6 hours?

ahew · July 5th, 2011, 2:29 pm

I understand from several FXO traders that one generally needs to account for the actual time remaining - in hours - when maturities are shorter than 1 week. I would suggest pricing some options - across a wide range of deltas and vols - to quantify the price differences when using 24- and 30-hours. Ditto for your (just a big longer than)1 week option.