Quantitative Finance Asked by Mercadian on October 27, 2021
Context:
Most emerging/frontier markets have no or very thinly traded volatility surfaces for their equity markets (single name and indices alike), furthermore, they usually have restrictions on Short-Selling and Capital Controls
Question:
How would you approach pricing/EoD MtM for simple european calls/puts in this market conditions? I’m interested in the heuristics/thought process, any practical experience and any literature.
What I’ve got so far:
Thx!
M
Tags
I think your list covers the approach quite well. What I would add to point 3(i) is that there is a (generally positive) spread of implied vols to realized vols. In this case what might be useful is to combine point 2 with point 3(i) i.e. ascertain the implied/realized spread from the proxy market and apply that to the realized vol obtained from your historical underlying data.
Answered by user35980 on October 27, 2021
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