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Foreign Exchange

Mispricing is not an option

There have been persistent rumours all year that not everything is rosy in the FX options world.

Clearly, August was a very trying month for many banks and while much of what happened then can be blamed on the difficulty in pricing forwards, it seems that some other issues have surfaced, particularly around pricing and revaluations.

Few people really want to talk about whether or not there are any issues. It’s as if the market is trying to convince itself that, by keeping silent, nobody will know. But the buzz is that many banks are having problems in pricing even vanilla options, particularly in dollar/yen. This is apparently because risk reversals have blown out to almost unseen levels, causing the smile to steepen to the extent where many players can’t fit it to their models.

Although it is easy to exaggerate the problem, many banks will no doubt be looking at how they price. And in such an environment, rumours spread quickly. Last week, I was told that Barclays had stopped streaming option vols and prices on its Barx platform. The obvious conclusion was that the bank must have done its cods. Not so, says a bank spokesman.

“Barclays Capital continues to stream both volatility and premium pricing for options.

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