FX Options Trading Book & Risk Measurement

Demetri Papacostas and Francesco Tonin

Now that we have talked about the theoretical underpinnings of a portfolio approach to managing an FX options trading book, let’s put it all together and, as you may be used to by now, kick it up a notch to the next level of complexity. The first sections of this chapter will repeat elements of Chapter 9 but from a more practical perspective. We look at a theoretical reaction of a trader who sells an option to a client the day before the French elections, and their subsequent adventure in trying not to lose money. Then we combine those elements with those of Chapter 10, and look at some new concepts by the end of the chapter. Specifically, we begin by reviewing the basics of delta hedging, which you’ve seen in a few different contexts, and then use real-world examples to discuss gamma, vega bucketing, value-at-risk and portfolio stress testing.

DELTA, GAMMA AND VEGA CONSIDERATIONS IN HEDGING THE FRENCH ELECTIONS

Let’s start with an example of historical significance. Suppose that a bank trader just sold an option to a client on the eve of the first round of the 2017 French presidential election. The following figures are actual screens and information a trader would be