Dion Global Solution's Rob Gray looks at the problems surrounding the pricing and valuation of centrally cleared OTC FX options.
The G20 has called for all
standardised OTC derivatives to be centrally cleared by the end
of 2012 with the intention to de-risk the markets.
Sensibly, the regulators have put
in place a staggered implementation requirement such that banks
and brokers can deploy the necessary technology and processes
for centrally clearing relatively straightforward derivative
instruments before moving on to more complex asset classes.
Despite the bilateral nature of
the OTC derivatives market, certain derivatives such as vanilla
interest rate swaps options and credit indices are already
cleared through Central Counterparties (CCPs). However, second,
third and fourth tier derivatives provide more challenges.
In the example of FX options and
especially exotic option contracts, the bespoke nature of each
contract and the unique obligations they are designed to fulfil
creates specific challenges, especially when it comes to
pricing and valuation.
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