FX Options and Smile Risk (The Wiley Finance Series)

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Product Description

The FX options market represents one of the most liquid and strongly competitive markets in the world, and features many technical subtleties that can seriously harm the uninformed and unaware trader.

This book is a unique guide to running an FX options book from the market maker perspective. Striking a balance between mathematical rigour and market practice and written by experienced practitioner Antonio Castagna, the book shows readers how to correctly build an entire volatility surface from the market prices of the main structures.

Starting with the basic conventions related to the main FX deals and the basic traded structures of FX options, the book gradually introduces the main tools to cope with the FX volatility risk. It then goes on to review the main concepts of option pricing theory and their application within a Black-Scholes economy and a stochastic volatility environment. The book also introduces models that can be implemented to price and manage FX options before examining the effects of volatility on the profits and losses arising from the hedging activity.

Coverage includes:

• how the Black-Scholes model is used in professional trading activity
• the most suitable stochastic volatility models
• sources of profit and loss from the Delta and volatility hedging activity
• fundamental concepts of smile hedging
• major market approaches and variations of the Vanna-Volga method
• volatility-related Greeks in the Black-Scholes model
• pricing of plain vanilla options, digital options, barrier options and the less well known exotic options
• tools for monitoring the main risks of an FX options’ book

The book is accompanied by a CD Rom featuring models in VBA, demonstrating many of the approaches described in the book.

FX Options and Smile Risk (The Wiley Finance Series) Review

Best FX Book I found so far, but that's not saying much. Lots of explicit equations, clear explanations and implementation detail.

However the one thing I've always hated about quant finance literature is they leave so much work up to the reader. This is not a paper limited by length or a college course.

For instance : Chapter 6 gives Black Scholes PDE w/ boundary conditions solution that apply to simple barriers. Out comes an equation with umpteen terms that reduces drastically under different conditions (but the reduction is not shown). I understand the need to save space and to offer a general formula that is inclusive of all cases but would it have killed Castagna to work out one real world example for say, a Down and Out Call with real world inputs ? He could have even put this in an appendix. The excel spreadsheet is a little unclear as to how it gets to its' reduction. Yes one could put in enough effort, but why not just explain it and save the reader the work?

I work in the field and rather than wading through it (the unbelievable amount of terms and sub equations in the result equation), multiple colleagues are leaning towards just buying an implementation.

The spreadsheets which implement the equations do not match Bloomberg,FINCAD/SuperD within any acceptable margin either which is deeply disappointing since they should at least be in the same range.

Still it's a good read for an overview and unfortunately the best I've found.

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