Smart! Basically you are telling the people that they will get the fish only if they know how to fish Never traded such options before, but I thought to give it a try anyway. I would try to do it by exploiting the property of put-call symmetry (for newbies this is not put-call parity) and the observation that a knock-out call should be synthetically equal to a vanilla put less an appropriate number of symmetically struck vanilla calls. Am I on the right track? Also in what you are asking for: Is there a skew, and is the interest the same for the two currencies? What I wrote above assumes (in my mind at least) no skew and zero cost of carry. Is this a source of your arb?
Nice reasoning. It's not analog : analog symmetry. It's a model dependent error on the binary : binary. The dealer is pricing a 1D option as 2D. I don't know if you missed it, but they're pricing the synthetic Euro binary as an American binary. It works on all of the majors accounting for swap and smile. EURUSD has the greatest edge at given vol due to the tight vol-market in the primary and hedge position.
Atticus: you are extremely smart. I think I have an idea of what you are saying. Essentially, you are taking free the difference between the value of being european and the value of being american. The name of the game is then: there is value in being american more than in being european. So, you buy as european thing and sell it as american, and pocket the difference (without moving anything between europe and america. ) I play something similar in a particular stock index, but I like better what you are doing as it seems to me that currencies offer better leverage, and also have the exotics which seem to offer a smoother implementation of these smart ideas. PS: Do you manage money Atticus? If you do not, I think it is a waste for others not to seek your expertise.
Riskfree, I don't think you have the ghost of a clue. If the dealer is pricing a European binary as American, the arb is obvious, far from rocket science. Even a monkey like you should be able to suss it out. The trick is to figure out what dealer. If he's offering it out on ET, it has to be a retail dealer. So, for exotics, that would be Oanda, Saxo, ABNAmro. Ok, I can't think of any others. Anybody know of any other retail FX exotic options dealers?
In short, you found a nice gentleman who is generously giving away free money. Great, that should last as long as he stays solvent. Any other plans after that?
Atty , this is just not cool. U promised me to keep it secret. This was the last time I shared arb trade with you. Read and weep