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Why bigger can be better with FX options
Large notionals often trade at significantly tighter spreads than smaller ones. Simon Nursey at Digital Vega explains why
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When we examine aggregated bid-offer spreads for foreign exchange options for different notional sizes on the Digital Vega Medusa multi-bank aggregator, we see something rather peculiar – bid/offer spreads for very large notionals are significantly tighter than those for smaller notional options.
Common sense dictates that larger sizes should demand a liquidity premium to cover the increased cost of covering the risk. So, what could explain this effect?
Dealer intervention and auto-pricingTr
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