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How to structure a FX option using Bloomberg. To begin with type option in the navigation menu followed by the go key Enter key. This will take you to the Option menu. Click on OVML Option Valuation Model and this will bring up the option calculator which will naturally default to a vanilla structure — in this case it is a a euro dollar three month put.
There are four important measures in valuing an FX option. When pricing a vanilla option there are two key influences that move the option price more than anything else. Firstly strike price and its proximity to spot. In this case we are pricing at the money forward. If I were price another strike we could simply over type 1. Straight away this makes the option a 1.
If I wanted to return to at the money forward, all I would need to do is click again ATM and this will bring me back to at the money forward. At the same time I can change the volatility. Bloomberg provides volatility through the Bloomberg volatility surface.
This is drawn from large institutions and is quite accurate. However if you wanted to use a different volatility surface you can easily over type this. If I put 10 and Looking at this now, I can see that my option premium moves with my change in volatility and also with my strike. Then I can move and type 7 in volatility. This will give me an indication of where the price will be. If then I wanted to use this and look for the payoff diagram I would move up to the right hand side and click on split view.
This will generate the payoff diagram for me at expiry. I can of course click this into a table which will generate my payoff after my option premium or alternatively I can click on dates and this will give me the option value as a function of nearest to expiry.
Where this is important is at inception is where the option is worth slightly more if I sell this back. I can also see this on a graph. If I wanted to bring up a series of options I can click on a matrix which will calculate a matrix of various options and option types according to strike and dates.
As you can see there are a number of different methods that I can use- so for strike, volatility or price on the X and Y axis. If I pop back to the model — what you can see is that when I return back to the model it keeps all my details in there.
This is the first lesson on how to price an FX option on Bloomberg. Fintute Powered by WordPress. Max Magazine Theme was created by. Leave a Reply Cancel reply. Interact Follow us on Twitter. Like us on Facebook Contact us. Exchange rates table is provided by DailyForex. Technical Analysis Part 1. How to use Bloomberg Excel Templates. Industry analysis using Bloomberg. How to price an FX vanilla option on Bloomberg. How to use the Bloomberg Commodity Forecast. Summary of Functions used: