TCVP option

TCVP option (Triangular Currency Variable Payoff)

Payoff = max [S – X(1+rδ)] x [Net Currency Exposure x (1+rΩ)]

where: δ and Ω are both IID unit normal stochastic, r is 30-day LIBOR

Pricing this option involves the use of a trinomial options pricing model.

The TCVP option is used in triangular arbitrage trading strategies and by corporations in hedging international cash flows. It is currently in use by major multinationals as the most effective way to manage currency translations.Fact|date=April 2008

The TCVP option was developed in 1993 by quantitative research analysts at Deutsche Bank Capital Markets Group. It was initially a proprietary product marketed to multinationals for currency risk management, but has since been implemented by most bulge-bracket investment banks. In 1996 the TCVP option was first utilized in triangular arbitrage strategies by D. E. Shaw. Proprietary traders used the same payoff structure to make exchange rate bets using cross-currency forward trades.