August 24th, 2012, 3:07 pm
Demand plays a large role, e.g. customers usually buying BRL Call USD Puts RKOs when somewhat close to a level the govt seems to be defending.What I remember is that a particular pricing software provider quite popular in FX used vanna-volga and some heuristics to arrive at the bid-offer (only 25d RR and Fly, no 10d), and traders used to check it when pricing exotics, which had a kind of self-reinforcing dynamic.As vanna-volga was not used in interpolation of vanillas, and therefore was not used in risk management, then you'd just shift the barrier and store 1st day P&L for the inevitable time decay (unless the option was KO).spv205 is correct, we had RM numbers with a sticky delta calculation and we'd calculate another delta that was calculated with a co-movement of spot and smile.