This document is designed to be a user guide to highlight the functionality of the FX Options Vol Converter.
The FX Options Vol Converter converts the extensive listed options pricing available on the CME, into an OTC-equivalent volatility surface, allowing OTC users to easily compare pricing and optimize execution.
The OTC Surface summary view shows the OTC-equivalent implied volatility surface at fixed tenors and deltas from a converted CME live price stream, with the ability to see a particular side of the market (Bid, Mid, Ask or Settle) that is of interest (see figure 1). The Settle view provides an OTC-equivalent surface based on CME’s daily 2 p.m. settlement values and is available for reference until the close of the next trading day.
The OTC-Equivalent Vol surface can be refreshed by clicking on the browser button shown below:
In the Summary view, a drill down functionality may be accessed by clicking on any bucket on the surface (see figure 1a). This will highlight the underlying CME instruments most closely associated with the implied volatility value within the bucket and show the unadjusted pricing data for each. This view allows you to quickly find the associated instruments on CME and recognize the option/futures price combination that feeds into the OTC-equivalent volatility.
For example, in Figure 1a below, when selecting the USD/JPY 2M tenor 30 Delta Put with an OTC-equivalent volatility of 6.89, the dropdown populates the specific CME contract info underlying this value: two October JYP/USD Call Options (JPUV00), two November JPY/USD Call Options (JPUXV0), and their associated DTE (Days To Expiration). It also shows their strikes, prices, deltas, underlying future, and future price. For inverted CME pairs such as JPY/USD and CAD/USD, there are two additional columns (1/Strike) and (1/Fut) displaying the inverse value for the strike and future price to provide a quick confirmation in OTC-like convention.
The Tenor Detail view compares contributing CME instruments nearest a specific tenor bucket, depicting a graph of the full delta curve. As with the OTC Surface view, you can drill down on a tenor/delta bucket and view a specific side of the market (Bid, Mid, Ask, or Settle).
Figure 2 below shows the OTC-equivalent implied volatility of the EUR/USD 2W tenor (row 2 in the table) alongside the underlying CME contracts most closely associated with this specific option tenor, the September EUR/USD Options (EUUU0) and October EUR/USD Options (EUUV0) ‒ in rows 1 and 3 respectively. The OTC-equivalent volatilities for each are depicted in the graph to show the full delta curve, allowing you to easily compare implied volatility measures of fixed tenors and deltas to associated CME instruments. Please note that when one of the CME contracts has an equivalent DTE to the OTC tenor, the two curves will be identical, and the green graph line will cover the CME line such that only two curves will be visible.
The Full Tenor view is an extended surface detailing the implied volatilities of fixed tenors and associated CME contracts intermingled for an overview of the full surface.
The Bid/Ask + spread view shows the bid and ask implied volatility values in one view for convenience (Figure 4). It also can display the spread between bid and ask (Figure 4a) to help identify areas of trader focus (a tighter spread may reflect active two-way engagement in that specific area of the curve).
The BAM Chart display graphically the vol smile for the Bid/Mid/Ask for a select Tenor.
The below provides a basic overview of the process, a more technical description will be available in a separate research paper to be published soon.
Converting American Term to OTC Term
Let’s assume replicates the payoff V of a long XXXUSD call option with strike K and maturity T. For to be equivalent one has to buy K units of USDXXX put option with strike . Finally, we multiply the ratio by to change the premium currency from USD to XXX.
We need to know the value of ϕ at time t, however we only know its value at time Texp. Given the information we have at time t, the expectation of ϕ should be a good approximation of ϕ. Such expectation is observable at time t, as Fut(t,TdelCME ) is traded on the CLOB and Fwd(t,Texp ) can be interpolated from the OTC forward curve:
We define Vspot as the premium of a CME option delivering on the OTC value date (Tdelotc), and, Vfut the premium of a CME option with a future underlying (TdelCME). Both options share the same expiry date Texp. The two option premiums are equal if we make a small adjustment to Vspot strike, called Kspot, to consider the future-spot basis ϕ. The equation below defines the relationship in detail.
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