In the wholesale markets, and by this we mean the interbank market and bank to financial institution for example, a hedge fund.

One of the main differences between quoting prices on FX options and all other options is the propensity to quote the price in volatility terms.

By this we mean that instead of quoting one of the price formats on the previous slide, we just quote the volatility input to our Black-Scholes pricer, knowing that the other side of the trade will see exactly the same price as us.

This is only made possible because the forward market in FX is very liquid with very tight bid offer spreads, certainly out to one year.

This means that there is no uncertainty about any input to the option price except for the volatility.

It is not possible to quote this way in other options markets, for example, rates and equities where there is sufficient uncertainty about the forward for a volatility quote to only work in approximate terms.

Sometimes in those markets you will see volatility quotes in the early stages of discussing a trade before it is replaced with an actual price.

In FX, traders quote volatility prices all the way through to execution.

Here you can see an example of a price run of at the money or ATM straddles, which we might see on a broker screen or in an electronic trading system.

Each expiry date has a two way price in volatility, all of which would lead to an unambiguous option price, As is common in other option markets.

In the interbank market, it is common to trade straddles butterflies and risk reversals.

In FX, these combinations are generally quoted in terms of their delta rather than their strikes, which is another difference between FX and other option markets.

For the reasons previously given, quoting a delta of an option in rates or equities would often not lead to both sides agreeing a strike price because of uncertainty around the forward level.

In FX, if two traders want to trade the 25 delta call at a certain vol, they will both agree the strike price exactly. The most common butterflies and risk reversals are those with 25 or 10 delta strikes, and these are generally liquid points in the interbank market for all major currency pairs in all expiries out to one year.

Generally speaking, liquidity in the ethics option market is good out to one year, but then diminishes.

There are some currency pairs, for example, dollar yen where certain long dated client trades can lead to trading in the interbank market beyond one year, but the majority of end user applications of FX options will be relatively short dated and this concentrates interbank liquidity in 0 to 1 year expires.