March 2nd, 2004, 8:00 am
here's anothere one, which is the daily bread and butter of many traders:how to price a vanilla 120% one year european call, (or 80% EP, whatever), on a liquid european stock with exitsting but illiquid option market (there are many of those).Please assume that:- there is one dividend expected, but neither date nor amount are officially confirmed-similar instruments trades infrequently, it is sometimes possible to get quotes but they will be say 5 volpoints wide, and for very small size- you either have to quote for a) only bid or ask, but for 10 times the daily volumeb) both side, for 1/3 the daily volume,and you have real political pressure from your bosses to win the trade or at least look good vs the competion, i.e. in (a) you have to be within 1 volpoint of the competition, in (b) you have to be 2 volpoint wide.this is just to point out that our academic work remain focused on the need to fit our volsurfaces to the market, and predict the market smile dynamics, but in reality very often the problem is that there is no such thing as a market.
Last edited by
granchio on March 1st, 2004, 11:00 pm, edited 1 time in total.