Premium Currency

Table of Contents

Summary

Premium currency is the currency an option's premium is actually paid in. The concept it names is standard market practice, codified in the ISDA 1998 FX and Currency Option Definitions (the industry-standard confirmation template for FX options), which requires every Currency Option Transaction's Premium to be specified against a currency amount in the trade confirmation – "premium currency" itself is not a term ISDA names as such, but the underlying requirement that every premium payment specify its own currency, independent of the option's Call and Put currencies, is exactly the field this note documents. Every currency pair has a default premium currency, but the default can be overridden, and the overriding currency need not be either leg of the underlying pair at all – a third currency, unrelated to both, is a legitimate choice. Premium currency matters beyond the mechanics of a single payment: for an option, where no single transactional currency naturally applies, premium currency is precisely what denominated currency resolves to under its per-instrument determination rule.

Detail

A per-pair default, overridable to a third currency

Each currency pair carries a conventional default premium currency – typically one of its two legs, following market convention for that pair – but the default is not binding. A counterparty can agree to pay an option's premium in a currency that is neither the base nor the quote currency of the underlying pair, a genuinely third currency chosen for reasons unrelated to the option's own underlying (investor preference, funding considerations, or simply matching a broader portfolio's own currency). Because the override is unconstrained by the pair itself, premium currency has to be modelled as an explicit field on the trade rather than derived automatically from the currency pair's convention.

Why premium currency is an option's denominated currency

An option is the clearest case in which no single transactional currency naturally exists: the underlying pair has two legs, neither of which is, by itself, "the" currency the option's economics are paid in. What actually changes hands is the premium, and so Transaction Currency and Denominated Currency's per-instrument-type table resolves an option's denominated currency directly to its premium currency, rather than to either leg of the underlying pair. This is the sharpest illustration of why denominated currency needs a per-instrument-type determination rule in the first place: without it, an option's Greeks and P&L would have no principled currency to be reported in.

See also

Emacs 29.3 (Org mode 9.6.15)