wilmott.com

Hello,I'm wondering if the vol surface for the EUR/USD pair would be the same for the reverse pair USD/EUR ?The reason of this question is, while I was setting the vol surface object in Murex, there was a field called "smile on a call" followed by the currency (for a EUR/USD, one must specify the base currency e.g. EUR). Can someone explain what is the market convention on that point, in which terms is defined a vol surface for a currency pair and why should one specify a "call currency" for the smile (when the smile is already defined for the pair)? Sorry if I seem a bit unclear, but I really need explanations from FX options specialists.Thanks in advance !Regards.

Hi. maybe we can both help eachother. I'm moving into exotic fx options where they use MUREX. Is it eay to pick up or unnecessaryly complicated???With regard to your questions -- as you know a call on EUR/USD is the same as a put on USD/EUR @ 1/strike. I assume you must define the ccy pair in so much that you are consistent. You can show that the vol of the log returns of say X and the vol of the log returns of 1/X are the same.The smile can be viewed as a plot of vol on the Y axis and strike(delta) on the x axis. if we chabge the ccy pair round the smile is a mirror image of its prior shape with the same vol applying to puts now rather than calls

It's fairly easy to pick up on Murex once the initial setting is done the right way. This part is crucial. You've got to understand the logic of the different functionalities available. Once you got that logic, that's straightforward. The good side of Murex is the level of fine tuning that is available to the end-user.Coming back to my question is it logic to define the vol surface in term of the base currency (EUR for a EUR/USD pair) ?Thanks.

Use call on EUR ... your traders will luv you for making that decision

shouldn't the surfaces be identical?A=ln(x)B=ln(1/x)=-ln(X)=-Aif ln(x)~(0,sigma^2)Var(A)=E[A^2]=sigma^2Var(B)=E[(-A)^2]=sigma^2