How does the foreign interest rate enter the Garman-Kohlhagen model?

In Garman-Kohlhagen, the foreign currency acts like a dividend-paying asset. The foreign interest rate r_f is subtracted from the domestic rate r_d in the d1 formula: d1 = [ln(S/K) + (r_d - r_f + vol^2/2) x T] / (vol x sqrt(T)). Higher foreign rates reduce call option value and increase put option value.

What is FX implied volatility and how is it quoted?

FX implied volatility is quoted as annualized standard deviation of log returns, typically for 1-week to 1-year tenors. Delta-neutral straddle volatility is the benchmark; risk reversals capture smile asymmetry; butterfly spreads capture kurtosis. ATM FX vols range from 5–6% for EUR/USD to 20%+ for EM currency pairs.

FX Option Premium (Garman-Kohlhagen)

Calculate European FX option premium using the Garman-Kohlhagen model (Black-Scholes adapted for FX): incorporating spot rate, strike, domestic rate, foreign rate, time, and implied volatility.

Principal ($)

Annual Rate (%)

Years

Compounding / Year

$ Finance Disclaimer: These calculators are for educational and illustrative purposes only. Results do not constitute financial advice. Consult a licensed financial advisor before making investment or borrowing decisions.

How It Works

Calculate European FX option premium using the Garman-Kohlhagen model (Black-Scholes adapted for FX): incorporating spot rate, strike, domestic rate, foreign rate, time, and implied volatility

Each component has a specific meaning:

Garman-Kohlhagen model (Black-Scholes adapted — The garman-kohlhagen model (black-scholes adapted recorded for the scenario being assessed.

Note: Interpret the fx option premium result against the thresholds and context described above.

How to Use

Enter the Garman-Kohlhagen model (Black-Scholes adapted for the scenario you are assessing. Calculate European FX option premium using the Garman-Kohlhagen model (Black-Scholes adapted for FX): incorporating spot rate, strike, domestic rate, foreign rate, time, and implied volatility. Use the fx option premium result to inform your calculation.

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