Skip to content
All library documents

How FX Delta Conventions Determine Option Strikes

Article Quant Q&A · Author: James87649
Read the original

Summary

The document addresses how to infer strike prices from an FX volatility surface quoted in delta butterflies and risk reversals. Converting those quotes into call and put volatilities is not sufficient by itself: the strike calculation also depends on how the market defines the butterfly and the delta used to quote or hedge the option.

In particular, market versus smile butterfly conventions and premium-adjusted versus unadjusted delta conventions lead to different strike determinations. The response points readers to a dedicated FX options reference for the detailed treatment. It gives no worked calculation or numerical example, so it serves mainly as a warning to identify quote conventions before deriving strikes. Its guidance is limited to pointing out the relevant convention choices rather than laying out a complete strike-solving procedure.

Key ideas

  • FX option strikes cannot be inferred from call and put volatilities alone.
  • Strike calculations depend on whether the butterfly quote uses a market or smile convention.
  • Premium-adjusted and unadjusted delta definitions produce different strike relationships.
  • A detailed FX options reference is recommended for the full derivation.

Tags

ForexOptionsVolatilityDerivatives pricing
Full text
# FX Delta Volatility


# FX Delta Volatility












I am looking at a Bloomberg FX vol surface quoted in 10 and 25 delta BF and RR. I know how to convert the RR and BF vols int 10D and 25D call and put vols, but I can't seem to imply a strike price from this.

Could someone please point me to a reference in this regard?

## Answer by Gordon (score 3)

https://quant.stackexchange.com/a/28405

The determination of the strikes are pretty complicated. It will depend on the types of the butterflies, that is, market or smile. Moreover, it will depend on the types of delta hedge ratios, that is, premium adjusted or not (i.e., in pct or in pips). I would suggest you go through Chapter 3 of the book Foreign Exchange Option Pricing by Iain J. Clark.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

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