Currency Options

On this page you can also compute the price, the "Greeks" (i.e., hedge parameters) and the implied volatility for currency options. It uses the same analytic code as Option Tutor, and is based on a trinomial lattice.

Instructions

To use this calculator to compute currency options, select "Vanilla" option, and enter the remaining data.

Before clicking on the "Calculate" button you should enter the foreign interest rate (as a decimal) beside "Dividend Yield." That is, beside the field labeled "Interest Rate" you need to enter the domestic country's risk free rate. Next, beside the field labeled "Dividend Yield" enter the foreign country's risk free rate. This ensures that you will compute the correct value for an option defined on a currency. You can then select whether you want to compute this for an American or European option on a future. If you have selected American then for greater decimal point accuracy you can set the field titled "Number of Steps" to 500.

Notes:

To calculate the price of an option, make sure that the "Implied Volatility" is not checked.
To calculate implied volatility, check "Implied Volatility" and enter a (feasible) "Option Price."

The program uses the volatility you specify as a starting value. Especially for barrier options, it is important that this be a good estimate. To get a good starting value, you can change the volatility and see what happens to the price.
If the implied volatility is shown as -999, then it means that the program failed to converge. This typically happens when the option price you have entered is inconsistent with the other parameters.
When you calculate an implied volatility, the Greek parameters are calculated based on the implied volatility. If you calculate a price, the Greek parameters are calculated using the volatility you specified.

You can work through the following Option Tutor exercise using the Java calculator provided here. To get to this exercise click on the currency option exercise. First use the inputs for this exercise to gain experience with computing the implied volatilities and hedge parameters for Deutschmark options. Second, compute some current numbers by getting the prices from the Philadelphia exchange and then using our online currency calculator.