Hi,I am asking a question which might look simple to you.When we use garman kohlhagen for pricing currency options with equation(S*Exp(-R*T)*N(d1) - X*Exp(-r*T)*N(d2))/Sigma*Sqrt(T)R : Foreign rater : domestic rateThe S in the equation is spot rate. If I am valuing the option today, is the spot rate for value today i.e. (Today + 2)?? or is it the spot rate for the exercise date of the option ??As in case of cap or swaption we consider forward rate in place of S, do we need to put spot rate for the maturity date of the option?Rgds

hi , The S in this equation is the spot rate , that is the Spot Exchange rate which settles (T+2). To emphasize my point let me tell u that it is NOT the forward rate for that option maturity. if u look at the Garman model closely u will find that the model takes the forwad rate into account while calculating the option premium .So to be very clear , u can actually test what i am saying by taking the spot exchange rate and then taking for example a 3 month forward rate for that currency pair and defining the 3 month forward rate as the Strike Price . This ofcourse means you are pricing a 3 month option. You will find that the model returns a delta of 0.5 . This means the model essentially captures the forward bias and prices the option accordingly .Regards Amitabh

Thanks Amitabh. I will try our ur suggestion today. We can meet during your trip to India.Regards,Vitthal