Definition of Standard Interbank Option Structure Volatilities

In the interbank FX options market, volatility is the principal quoting dimension. To standardize quotes and streamline trading, most banks adopt a set of Standard Buckets to describe the entire implied volatility surface (Vol Surface). This article systematically explains the naming, calculation, and usage of volatilities for Standard Option Structures in the interbank market.

1. Common Standard Dimensions

ATM (At‐The‐Money)
The ATM volatility is the implied vol of a near‐ATM option (≈50 Δ). Banks typically quote an ATM mid‐vol and then apply a bid/ask spread.
Δ-Risk Reversal (RR)
An nΔ Risk Reversal measures the skew between an out-of-the-money Put and an out-of-the-money Call at the same delta:
RRₙ = σ_call(nΔ) − σ_put(nΔ)
The most common in FX are 25Δ RR and 10Δ RR.
Δ-Butterfly (BF)
An nΔ Butterfly measures the “smile” width around ATM:
BFₙ = [σ_call(nΔ) + σ_put(nΔ)]/2 − σ_ATM
Again, 25Δ BF and 10Δ BF are standard.
Straddle & Strangle
- A Straddle (buy 1 Call + 1 Put at the same strike) has an implied vol ≈ σ_ATM.
- A Strangle (buy 1 Call at K₁ and 1 Put at K₂) has an implied vol ≈ (σ_call + σ_put)/2.
  These are less often quoted as standard buckets but are useful for bespoke structures.

2. Deriving Standard Buckets from Call/Put Vols

Given three points—σ_ATM, σ_25C (25Δ Call vol), and σ_25P (25Δ Put vol)—you can compute:

25Δ Risk Reversal
RR₂₅ = σ_25C − σ_25P
25Δ Butterfly
BF₂₅ = (σ_25C + σ_25P)/2 − σ_ATM
25Δ Strangle Volatility
σ_strangle(25Δ) = (σ_25C + σ_25P)/2

Conversely, if you know ATM, 25Δ RR, and 25Δ BF, you can recover:

σ_25C = σ_ATM + BF₂₅ + RR₂₅/2
σ_25P = σ_ATM + BF₂₅ − RR₂₅/2

By standardizing on these buckets—ATM, RR, BF (and their 10Δ counterparts)—banks can quote a compact, consistent vol surface to one another, then interpolate to price any bespoke structure.