FX Index Pricing
Posted: October 4th, 2009, 4:33 pm
I received a question regarding pricing a geometric basket of FX Index. Let's say we have GBP index that constitutes GBP to USD, to JPY and to EUR with proportion 50%, 30% and 20% respectivelyIt has to be priced as "for three tensors or trade value dates: Spot, IMM1, IMM2. Index value for spot value date is provided for indicative purposes only and therefore it is not tradable"First can I assume that one of the FX components is quoted as GBP/EUR not EUR/GBP? You know if they are inverted the pricing can be totally wrong !!Second can I assume that there will be three derivatives / instruments available on the screen which is:GBP Index - Spot - IMM1 - IMM2Third if q2 is correct. For the BID price of the IMM2, I must grap the BID price of USD,JPY,EUR. By some sort of magic formula, I transform the numbers into the BID price of my index. Then I can also take the ASK price of USD,JPY,EUR from IMM2 and calculate the ASK price of my index as well?Thanks in Advanced