Standard foreign currency options are priced around the forward rate.

Question

Quizplus · Accepted Answer

Standard foreign currency options are priced using the Black-Scholes model, which assumes that the underlying asset follows a lognormal distribution and that the option is exercised at expiration. The model uses the forward rate as one of its inputs, which means that the option's price is directly related to the forward rate. Therefore, we can say that options are priced around the forward rate.

Standard Foreign Currency Options Are Priced Around the Forward Rate