Butterfly
A convexity quote combining wing and ATM volatilities.
Read the contractual cash flows first.
Butterfly asks how expensive both wings are relative to the centre.
A convexity quote combining wing and ATM volatilities.
Express payoff and present value precisely.
Notation and units
Decimal rates and volatilities, year-fraction time and continuous compounding unless stated otherwise.
Make conventions part of the contract.
Contract dates, calendars, settlement, notionals and payoff currency are part of the valuation input.
Discounting and projection conventions must match the collateral and quotation framework.
The displayed payoff omits legal terms and lifecycle events unless stated otherwise.
“An unstated convention is a future reconciliation break.”— THEQUANTBATEMAN
Locate the quote and replication instruments.
Builds smile curvature alongside ATM and risk reversal quotes.
Map cash-flow changes into hedge risk.
Reconcile the contractual payoff before reading the FX risk. Small date or convention changes can move cash flows before any model parameter moves.
Ask Bateman about this topic →