FX Vol 101

• Vanilla options in G10 are usually physically delivered; if the option is exercised, there will be an exchange of cash flows (FX spot trade occurs)
• In some EM pairs, vanilla options are cash settled; at maturity a fix is used to determine a settlement amount (usually paid in USD)
• Under Black-Scholes, if CCY1 and CCY2 interest rates are equal, the forward path will equal spot
• if CCY2 interest rates are higher than CCY1 interest rates, the forward path moves higher as T increases
• When pricing is non-path dependent option, assuming constant rate across time is not so problematic so long as the forward to maturity is correct.

  When pricing path dependent options, your forward rate model choice is important as it generates different trading exposures
• Black-Scholes SDE operates in log-space. It's not the same as spot space. WIth high vol and long tenor the difference becomes more pronounced. Log-normal distributions have a longer tail on the topside in regular spot space and never go below zero.

  
• For very low delta strikes, it often makes more sense to quote prices on them in premium terms rather than implied volatility terms, particularly at shorter tenors