My first post after the changes on the page from way back, apologies if I'm using the wrong forum, breaking some well known traditions/etiquette or simply asking to much of a dumb/general question.
I'm looking for some insight about option pricing or volsurf construction...
Most emerging/frontier markets have no or very thinly traded volatility surfaces for their different markets, furthermore they usually have restrictions on Short-Selling and Capital Controls.
How would you approach Pricing/EoD MtM for simple european calls/puts in this market conditions? I'm interested in heuristics/thought process, practical experience, literature references.
What I've got so far:
- Replication/cost of hedging... (usually hindered by some of the restrictions on short selling).
- Find a correlated asset that has the desired attributes (liquid spot/Vol and short selling) use this as a proxy.
- Use the underlying's historical spot market data**:
- Using realized volatility / econometric / statistical projections.
- Deduce a historical distribution single or rolling.
** Including accounting for regularities observed in proxy assets... like spread between RealizedVol vs ImpliedVol
Any insights would be greatly appreciated.