QuoteOriginally posted by: frenchXThat's a very interesting topic. At the moment I'm reading a review about superhedging by Davis Hobson. That's nice since you don't take care of the model but the superhedging price will be SO HUGE than no one will enter the contract.When you are pricing exotics by superreplication you are assuming that you are infinite risk averse (for any affine model you can be safe).Another approach to that is the utility based pricing (where you assume that you want to bear some risk).Modelling the market in PHYSICAL sense is in my view a nice idea. I have read a thesis about a guy who modelled the crude oil by a multi agents model based on economical argument and it fits very well the market. For me the real question is the link between the underlying price and the option one. Assuming only a link through their vols is maybe false.A lot of work and I'm very happy to see that some people working in banks begin to ask themselves those questions @Alan; if you are interesting into hedging a barrier option, I can send you a paper of Carr about semi static hedging (it's a static hedging which is rebalanced if the option knocks). Here a paper http://www.math.nyu.edu/financial_mathe ... -2.pdfHave
a look at the theorem 5.5Sorry for this statement BUT this is true. I can prove it.As far as crude price is concerned, it is purely based on "Cornering of the market based on a Significantly flawed contract design" . It should not trade as it is trading today. This contract is a joke.