Hi Guys, I am wondering if any of you can give me a quick answer or link on this:a) a good definition of pin risk in FX contextb) how to measure, calculate pin riskc) how does pin risk affect barrier optionThx

(a) Pin risk has a specific, and a more general meaning.Specifically, it refers to the assignment process for exchange traded options. Suppose you are short a call, and just before expiry, the future is 'pinned' to the strike. you are not sure if you will be exerciesd or not. at (or just before) expiry, the longs have to notify the exchange of their intention to exercise. there is then a lag as the exchange assigns these contracts between the shorts, your clearer is notified, and your clearer notifies you. in the meantime, ther mkt is moving, and you do not know what to do, as you are unsure of your position (whether you've been exercised fully, partially or not at all).If you have a conversion or reversal, its even more complex, cos you have to decide whether to exercise your long, and your optimal decision is driven to a large degree by what you think your counterparty holding the other leg is going to do.so it gets a bit messy - thats pin risk. particularly annoying if you've done a conversion / reversal precisely to square off risk, and here you are, left with a f**kup at expiry.more generally, pin risk is often used to denote the uncertainty related to expiry, where the option is expiring close to ATM.(b) I don't think pin risk is amenable to calculation, although on exchange, some exchanges may be better than others at mitigating pin risk by timely information disemmination.(c) pin risk can be acute for barrier options, where the barrier is close to being triggered. think of a scenario where the underlying is hovering just below an up-and-out barrier, with 1 minute till expiry. Nightmare.

Thank you Sir,My concern remains measuring the god damn things.... How about scenario tabulations

Well, I'm not sure that you will end up with meaningful results, but if you are determined to try, you could consider:- is it exchange-traded or OTC: exchange-traded options have more pin risk due to the clustering of strikes and expiries- if on exchange, how quickly do you get notified of assignment; varies by exchange, talk to your clearer- liquidity is important. If contract is highly liquid, pin risk is minimised, as you can turn your position around quickly. also, ifd highly liquid, people will not tend to exercise even if one tick out of the money, whereas for illiquid underlyings, there is much greater uncertainty as to whether counterparty will exercise, and for what range of underlying.

Andym, this business of assignment risk is a very academic take on the issue. I mean you are correct, but the practical trader's perspective is that your greeks are going haywire as you approach the strike on expiration.Your point about the barrier option speaks to that well, but I would also make the point that the same can be said for any vanilla option. Short 1000 S&P500 puts below the market, and what happens? Around the strike, a downticks makes your delta long 1000 futures and an uptick makes your delta zero. That can make for a very long Friday.

PaperCut, I agree that your gamma risks are going to tend to be the far bigger issue, but that wasn't the question.what you describe is goold old gamma risk.to my mind, pin risk encompasses those risks surrounding expiration that cannot be captured by delta, gamma etc, such as:- I have a conversion, ATM. I need to notify the exchange what I'm going to do before I know whether the shorts are going to exercise their leg. Now this may be a relatively minor risk, depending on yr book, but considering that in this instanjce you might have thought you were dead flat 2 days ago, it can be bloody annoying.- I am short an option which is marginally OTM coming in to expiration. Will my counterparty choose to exercise, either cos I'm providing liquidity, even if slightly OTM, or he wants to screw me over and see me chase the mkt.

Well said.

I would describe pin risk as being short a strike close to the market spot rate just hours or minutes before expiry, without possibility to buy this strike back. It is a very simple deffinition but describing a whole issue i guess. How to manage it? There are two possible scenarios1. You earn time decay if spot ends v close to Your strike and You earn money 2. You loose if market breakes strike at the expiry strongly (light version) or if spot breakes strike twice , 3 times or even more just before expiry (hard core, unlimited losses) The only way is to hedge X amount of such a strike by a X/2 on spot with e reasonable stop looses settled around this strike.But nobody knows whats a reasonable stop - loss and nbdy knows how many times spot wud breake a strike.Optimistic things are that its possible to minimize a number of pin risks by buying back an option and that market ends at the strike relatively seldom. good luck