2
$\begingroup$

I am attempting to calibrate my SV(heston) model to market data. My intention is to minimize the difference between market IVs and my model's IVs. I use Bloomberg to get the data, however fx options are quoted in different way than equities and I can't arrive to recover volatility surface in needed format from these data.

I can download the data in following format: RR/BF or Put/Call and Bid/Ask or Mid/Spread

What I want is to get set of strikes, maturities and IVs for them.

Thanks for ideas![bloomberg screenshot for AUDUSD

$\endgroup$
  • 2
    $\begingroup$ You can extract the strikes from a knowledge of the deltas. Just write some code to solve for the value of K that gives a delta of 0.35, 0.25, 0.15 for calls and puts. $\endgroup$ – Dom Aug 11 '16 at 17:10
2
$\begingroup$

Due to the nature of OTC trading of FX Options for the majority of the market, they are traded in volatility prices and strikes in delta space. You can derive the specific decimal strikes based on the Black-Scholes delta using the at-the-money volatility for a particular smile tenor, given you know the values of the other parameters in the BS formula as well. However there is a listed FX Options market too, and CME is the largest of all, but it is only liquid for a limited number of pairs.

The typical benchmark spreads are 25D RR/FLY, 10D RR/FLY, together with atm those are the points you want to calibrate to.

$\endgroup$
  • 1
    $\begingroup$ Thank you for the answer! How exactly should I set up bloomberg, for easiest conversion to IVs wrt to strike and maturity? .. RR/BF or put/call $\endgroup$ – Michael Mark Aug 12 '16 at 8:20
  • 1
    $\begingroup$ I am not sure if you can set up BBG so that it will give you vol per strike. You will most likely be backing out the vols yourself. As I said, 25D RR, 25D BFLY, 10D RR and 10D BFLY together with ATM will give you 5 points on the smile. Using those points, you will be able to calibrate your smile model. Once your smile model is calibrated, you will be able to get any vol/strike from the model. $\endgroup$ – SilentKnight Aug 13 '16 at 21:24

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.