Hi all,I am reading something about FX option strategies, and am a bit confused about what the real strategy contracts look like.In my understanding, FX option strategies are commonly quoted in volatilities for ATM straddle, 25 delta butterfly (market strangle) and risk reversal, occasionally, 10 delta butterfly (market strangle) and risk reversal. Clearly, with straddle and market strangle volatility quotes, one can get the prices for these two strategies. When it comes to risk reversal, it seems that there is no model-independent way to get the price for it, i.e., one has to assume a parametric form for the volatility surface and calibrate from market strangle to smile strangle, as described in Clark's book. Once this is done, one can then get the price for the risk reversal strategy.But, in reality (at least in my imagine), there should be a more transparent way to get the price for risk reversal (or there isn't?) from the market quotes. Thanks!

Hi,Risk Reversals are relatively liquid strategies, so 25D or even 10D riskies are quoted by market makers for most of the G10 and crosses. Obviously when it comes to illiquid crosses one has to incorporate correlation assumptions, that often makes the risk reversal different between market makers. If you want to price risk revesal of different delta you will eventually have to calibrate the vol surface from the quoted strategies (using Vanna Volga probably) and interpolate the range of strikes (quoted in delta term).

@Simon, I have been thinking about the same problem. Did you get any info on this? I believe a market maker would have a view on risk reversal as it is related to the skew in the volatility of the underlying. What I am interested in knowing is how would he take a view on the price of 25 del risky. Guessing it should related to historical volatility of the underlying in some way?