FX Options Errata
-
In section 1.4 on the basic strategies containing vanilla options, I give examples of the various strategies along with profit graphs. In the tables that illustrate the strategy with actual numbers, the currency pair is EUR-USD and the premiums are given in EUR. However, in the profit diagrams, the premium amount is actually in USD.
For example, in section 1.4.5 on the Strangle, from Table 1.15 a EUR 1,000,000 notional is used and the premium given as EUR 40,000. If we focus on the call strike of 1.2000 EUR-USD, the profit diagram in Figure 1.14 shows that we break even at an spot rate at maturity of 1.2400 EUR-USD. If this were the case, we would be buying EUR 1,000,000 @ 1.2000 for a cost of USD 1,200,000 but it would be worth EUR 1,000,000 * 1.2400 = USD 1,240,000. For this to be our breakeven, the premium we paid must have been USD 40,000 and not EUR 40,000.
The same situation appears in the other strategies given in section 1.4. Thank you, David Bannister for pointing this out to me. - page 36, section 1.4.6 Butterfly: A long Butterfly is a combination of a long straddle and a short strangle. Figure 1.15 shows the profit of a long Butterfly. Thank you, Anupam Banerji (Equities (IT), Credit Suisse, Sydney, Australia) for pointing out to me that the way it is written is confusing. However, there is still a dispute in the market about the notion of long and short butterflies (I think). I like to think of a long Butterfly as betting on market activity.
- page 51, equation (1.120), gamma of the one-touch. In the last two lines, the e+ and the e- are divided by tau. They should be divided by (2 tau). Thank you, Sven Foulon and Yanhong Zhao, for pointing this out. Yanhong produced a corrected formula in pdf.
- page 64, formula (1.185) for the instalment: The put-call indicators phii have to be also in front of all the ratios inside the normal cdfs. The index i should match the index of t. Thank you, Searle Silverman, for pointing this out to me.
- page 87, the second "Asymmetric power option" section title should be "Symmetric power option". Thank you, Harold Cataquet, for pointing this out to me.
- Section 1.5.5 on lookback options has a better presentation in the new version by Andreas Weber and Uwe Wystup, contributed to Wiley's Encyclopedia of Quantitative Finance. In particular, the spot reference in Table 1.24 is 0.9800 rather than 0.8900.
