Market Convention to convert Notional amount to calculate FX Option premium ??
Posted: January 16th, 2006, 4:32 am
What spot rate is used to convert notional amounts while calculating FX Option Premium?For Example,If I buy a USD Put/ JPY Call, X= 120.00 , Expiry 3 months , Notional JPY 500 mio.The Spot reference rate used for pricing was 116.00 and delta was also exchanged at that spot rate.Lets say, the premium comes out to be 1% USD.Now, What is the market convention used to calculate premium? a) 500 mio / 116 * 1% ( using the spot reference rate to convert the notional amount) ORb) 500 mio / 120 * 1% ( using the strike rate of the option to convert the notional amount)Thanks in advance for the responses.