interest rates for FX options

Discussion in 'Options' started by stevenpaul, May 31, 2012.

  1. Hi folks,

    Which interest rate is considered domestic and which is considered the foreign rate for purposes of calculating pricing and Greeks of FX options. In Black-Scholes, we only deal with one interest rate, but the FX option model by Garman and Kohlhagen appropriately provides for two interest rates, one for each currency represented in the pair (e.g. Euro Zone and US for the Eurusd). Taking the Eurusd as an example, which would be considered the domestic currency and which the foreign currency? The model has inputs for "risk-free rate" and "foreign risk free rate."

    Thank you for your help!
  2. TskTsk


    Eur usd spot is quoted in USD per euro, thus USD is domestic and euro foreign. If I remember correctly.
  3. Thank you very much, TskTsk. You're saying the quote currency is considered the domestic currency? Thus, JPY is domestic and USD is foreign in the USDJPY. Any thoughts on where to verify this. Googling seems a bust.

    Thank you!