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FX Options on DKKNOK
Posted: January 3rd, 2011, 1:55 pm
by Zibi
HiI am currently struggling with a valuation of fx options on DKKNOK. I wanted to calculate a cross volatility of DKKNOK through EUR as the base currency (vol of EURDKK and EURNOK). The problem is that I don't have an access to quoted vols for EURDKK. As DKK is pegged +/-2.5 to EU, I started to consider the approximation of using vol of EURNOK instead of DKKNOK. Alternative is to use USD as the base currency. I can find only ATM VOL (no RR, no BF) for USDDKK and NOKDKK. Also, this pair is much less liquid than with EUR as the base currency.Which approach is the best to deal with DKKNOK options? Is there any expert who have dealt with this problem before? I'd be very grateful for any comment.Thanks
FX Options on DKKNOK
Posted: January 6th, 2011, 5:33 pm
by rickynu
you have USDDKK options vol - can you get USDNOK options vol as well?
FX Options on DKKNOK
Posted: January 7th, 2011, 12:35 pm
by Zibi
I could use the cross though USD but there are two problems with it:1) USDDKK or USDNOK is less traded 2) There are neither RR nor BF quoted for USDDKK. So I'm not able to obtain the smile on the USDDKK surface.
FX Options on DKKNOK
Posted: January 7th, 2011, 1:08 pm
by tags
if you are faced with a lack of liquilidity on the crosses in question, and if there are so few options traded, don't you think that any option pricing attempt is a chimera ?in the agricultural commodities space, an epitomizing example is euronext corn. futures contracts and options traded volumes are so low that any theoretical valuation of options seems in vain ...
FX Options on DKKNOK
Posted: January 7th, 2011, 5:06 pm
by frenchX
The remark of Edouard is actually very good in my opinion. If you trade options in a very limited depth market, then any linear conventional pricing model are senseless cause each position (as hedging for example) will impact the market quite significantly. You will have a liquidity positive feedback effect and so the pricing (and even the trading) is highly nonlinear.
FX Options on DKKNOK
Posted: November 10th, 2011, 9:24 pm
by Skog
QuoteOriginally posted by: ZibiI could use the cross though USD but there are two problems with it:1) USDDKK or USDNOK is less traded 2) There are neither RR nor BF quoted for USDDKK. So I'm not able to obtain the smile on the USDDKK surface.An old thread, but why not add my first post...You may use the RRs and BFs of EURUSD as a proxy for the USDDKK surface. As the DKK is linked to EUR through ERM II the EURUSD and USDDKK surfaces trade very closely. You may also just use the entire EURUSD surface instead of USDDKK. Just remember to flip the sign of the riskies for the USDDKK surface.