FX Options Trading Book & Risk Measurement

Demetri Papacostas, 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.


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 looking

To continue reading...

You need to sign in to use this feature. If you don’t have a Risk.net account, please register for a trial.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an individual account here: