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ATM Versus ATMF Options and Delta Hedging in FX

Article Quant Q&A · Author: Ussu
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Summary

The document distinguishes spot at-the-money options from at-the-money-forward options in foreign exchange. In the described convention, an ATM option has a strike equal to the current spot rate and its delta is hedged in the spot market. An ATMF option uses the forward rate for the option’s expiry as its strike and is hedged with the corresponding currency forward.

A EUR/USD call example illustrates the difference using a three-month maturity: the spot-based strike and forward-based strike differ, as do the hedge instruments and quoted delta proportions. The figures are an example under the stated market inputs, not universal values. The explanation assumes the question concerns options and gives a simplified convention; practical delta and hedge choices can depend on market conventions and the option’s terms.

Key ideas

  • An ATM FX option in this example uses the current spot rate as its strike.
  • An ATMF option uses the forward rate to the option’s expiry as its strike.
  • The example pairs spot-strike options with spot delta hedges and forward-strike options with forward hedges.
  • The numerical hedge proportions depend on the example’s inputs and conventions.

Tags

ForexOptionsDerivatives pricingExecution
Full text
# Example of an ATMF trade in FX market


# Example of an ATMF trade in FX market












Pls give an example of ATMF and how is it different from a regular ATM trade?

## Answer by AlRacoon (score 1, accepted)

https://quant.stackexchange.com/a/49413

Based on your description of ATM and ATMF in the comments, and my assumption that you are talking about options, an ATM trade would be an option trade where the strike would be spot and the delta would be hedged using the spot market.

An ATMF trade would be an option trade where the strike would be the forward price to the expiry date of the option and the delta would be hedged using the currency forward.

So for example, if you look at EURUSD, Spot = 1.11 and you buy a 3M Call ATMS, the strike would be 1.11. Hedging the delta in the spot market would be a short 59.84% position the spot EURUSD to be delta neutral.

A 3M Call ATMF would be where the strike would be 1.1173 where spot is 1.11. Using the Spot to hedge this would be a short position of 49.64% in spot EURUSD to be delta neutral. Using the forward would be shorting a 49.51% position in the 3M EURUSD forward to be delta neutral.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.