Banks adopt new options-pricing practice

LONDON – Banks are building a consensus around a new foreign exchange options convention that requires premiums to be paid at expiry, in response to the emergence of premium-related disputes caused by the crisis.

The convention, developed by a group of 20 banks and brokers, was effected in October to deal with the growing disparity between global funding rates used to calculate discounted premium prices. While option premiums are priced using models such as Black Scholes that generate premium