Volatility-based quoting

• Enables “delta-neutral” trading
• Eliminates the execution risk inherent to trading in live premium
• Is offered with European and American-style expirations for five of the currency pairs
  • Australian dollar initially available with American-style expiration only
• Utilizes CME Group’s existing FX options and futures products
• Is 100 percent fungible with the exchange’s existing premium-quoted FX options and futures.

• In addition to quoting single product type, volatility-quoting is available for three types of spreads using single volatility bid and offer inputs: straddles, strangles and verticals.
• Matching of volatility prices occurs on a FIFO basis, with minimum price fluctuations of 0.025%.
• A refined tick pricing granularity (1/10th regular tick) ensures accuracy of the volatility-to-premium conversion.
• When a trade occurs, the volatility match is reported, but customer accounts receive only the individual option legs and associated futures hedge breakdown.
• The pricing engine converts volatility matches using the Black model for European-style options and the Whaley (over Black) model for American-style options.
• The engine also allocates a delta-offsetting futures position to each party in the transaction based on the mid-price of the underlying futures contract at the time of the match.
  • This futures allocation is not reported in MD as an actual transaction (similar to covered transactions).
• Fees apply to the option legs only.
• CME Group anticipates providing early incentives for market-makers similar to those in place for premium-quoted options.

Over the past two years, CME Group has enhanced its FX options offering by adding European-style expirations and increased market accessibility by listing all of our most actively traded FX options on CME Globex. These changes have helped fuel year-to-date 75 percent growth in FX options volume through the end of Q4 2007 with an average daily volume of $2.4 billion.