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Interpreting Extreme Long-Dated AUDJPY Market Strangle Volatility

Article Quant Q&A · Author: BrownianBread
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Summary

The document raises a question about very negative AUDJPY market strangle volatility quotes at long maturities. It gives examples for 25-delta and 10-delta strangles, alongside an at-the-money-forward volatility level, and asks whether the resulting concave volatility smile is realistic or potentially arbitrageable. The stated delta convention is forward delta, with the at-the-money strike set at the forward rate.

No explanation, pricing method, analysis, or answer is included. The quoted levels are the questioner's observations, not independently verified market data, and the document does not establish whether the quotes are valid, how the market-strangle convention is defined, or whether arbitrage conditions are breached. It is useful chiefly as a prompt about interpreting FX volatility conventions and checking extreme smile quotes; resolving it requires additional market and model context.

Key ideas

  • The question concerns unusually negative long-dated AUDJPY market strangle volatility quotes.
  • The quoted volatility smile is described as highly concave, prompting an arbitrageability question.
  • The stated FX conventions are forward delta and an at-the-money-forward strike.
  • The document provides no analysis or answer that confirms the quotes or establishes arbitrage.

Tags

ForexOptionsVolatilityDerivatives pricing
Full text
# Extreme AUDJPY FX vols


# Extreme AUDJPY FX vols












I'm seeing levels of -12% of market strangle vol at 25 delta for AUDJPY at 20Y onward that is causing havoc with my pricing routines, the 10 delta market strangle is trading around -6% which is again quite negative. Is this level of market strangle vol realistic as the smile becomes extremely concave and possibly arbitrageable?

To be precise with FX conventions, my delta convention is forward delta and the ATM strike is ATMF with vol around 15%.

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