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September 2000
Background Information
on the statistical release
IMPLIED VOLATILITY RATES
FOR FOREIGN EXCHANGE OPTIONS
The implied volatility rates for foreign exchange options, posted on the Federal Reserve and the Foreign Exchange Committee's web site (www.newyorkfed.org and www.newyorkfed.org/fxc/) are a month-end data series intended as a service for the foreign exchange community, auditors and examiners.
The Foreign Exchange Committee-- sponsored by the Federal Reserve Bank of New York and comprised of institutions representative of the foreign exchange market in the United States--initiated the work on this series. The Committee believed that the auditing and management of options would be strengthened with supplemental and independently prepared information.
Detail on the Volatility Rates
The web-posted implied volatility rates:
- Are averages of mid level rates on bid and ask "at-money-quotations" on selected currencies.
- Are provided by approximately ten (10) volunteering foreign exchange dealers.
- Reflect quotes as of 11 AM, New York, on the last business day of each month.
- Exclude the extremes--the highest and lowest quotes--received from the dealers. (The intent is to count out outliers. A consequence of such an adjustment is that the indicated rates may not completely reflect the full range of market transactions.)
- Reflect rates on contracts of at least $10 million that are made with a prime counterparty.
The contracts currently include the euro, the Japanese yen, the Swiss franc, the British pound, the Canadian dollar and the Australian dollar. The following cross rates are also included: the euro/sterling and the euro/yen.
The maturities now include one week and one-, two-, three-, six-, and twelve-month as well as the two-year.
Compiling the Volatility Ranges
On the final dealing day of each month, each participating institution completes an Excel file that has been sent to them by the Foreign Exchange Department of the Federal Reserve Bank of New York. The Foreign Exchange Department, at the Committee's request, is the collector and publisher of this series.
The Federal Reserve Bank treats all volatility quotes it receives as confidential and will not disclose the rates supplied by any individual survey participant. In the event a minimum of five quotes is not submitted for a particular option, a volatility range will not be published for that contract.
Publishing the Data
The results of the survey are released on the last business day of each month at approximately 4:30 PM.
How to Use the Data
The ranges of foreign currency implied volatility rates are intended solely for the use of bank management, auditors, and examiners in their review of options portfolios.
The publication of the data does not indicate Foreign Exchange Committee or Federal Reserve approval, or disapproval, of particular options activities. Furthermore, the data should in no way replace the proper risk analysis and management techniques necessary for managing an options position.
Although the volatility rates are collected from sources considered to be reliable, the ranges are provided only for informational purposes without guarantee of their accuracy, completeness, and correctness.
Comments and suggestions about the series are welcome and may be sent to the Webmaster.
