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Topic Title: Conversion of Strategies vol (ATM/Risk reversal/Butterfly) to Smile delta vol (ATM, Put and Call)
Created On Tue Nov 27, 12 01:23 AM
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lampalork
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Posts: 6
Joined: Nov 2012

Tue Nov 27, 12 01:23 AM
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Hi Everyone,

I?m fetching FX vols from Bloomberg: ATM, RiskResersal 10/25 Delta and Butterfly 10/25 Delta.
For each of these quotes, I get a mid / bid / ask.

i.e.
VolQuote; Mid ; Bid ; Ask
USD/IDR 1W ATM; 3.137; 1.637; 4.637
USD/IDR 1W 25_Delta_RR; 2.287; 0.301; 4.273
USD/IDR 1W 25_Delta_BF; -0.0475; -2.615; 2.519
USD/IDR 1W 10_Delta_RR; 3.748500 ; -1.065000 ; 8.562000
USD/IDR 1W 10_Delta_BF; 2.443500 ; -1.657000 ; 6.544000

From these quotes, I want to get my vol surface expressed in delta (i.e. I want to get ATM, 10/25DeltaCall and 10/25DeltaPut).

To calculate the Mid vols, I use the standard formulas:
25_Delta_Call_mid = Butterfly_25_Delta_mid + (Risk_Reversal_25_mid / 2) + ATM_mid
25_Delta_Put_mid = Butterfly_25_Delta_mid - (Risk_Reversal_25_mid / 2) + ATM_mid

So far, so good. That works. No surprise.

When I apply the same formulas to, let say, calculate the Asks. It does not work anymore; I?m getting negative vols.
Any idea how people work these things out?

thanks for your help
regards
 
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gpop
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Posts: 49
Joined: Nov 2003

Fri Jan 04, 13 04:09 PM
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Your quote on ATM shows that the bid-ask spread is 3% vol (bid-to-mid 1.5% and mid-to-ask another 1.5%).
Could you not use this information to apply the same spreads for the call and the put ?
 
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