It is commonly known that the FX option mkt trades 25D/10D Risk Reversals and 25D/10D Butterflies, hence able to build volatility surface to price other any vanilla type of options. Problem with this is only OTM (eg. 10delta/25delta) instruments are avaliable from the market. Well, evaluating ITM call (put) seems not so straight forward and can be solved by using OTM put (call) price/volatility due to put-call parity. But, if they are americans, how would i evaluate those ITM american options provided that they are not so deep in the money? (otherwise S-X or X-S will do the job)Kind Regardsdan

One well-known approach is used in Energy derivatives market where often quoted prices (NYMEX) are given as american options on standard futures contracts.Here it is applied a forward induction method (Fokker-Planck PDE) such that it is calibrated to a given set of market prices (maturity/Strike).

Thanks for your inspiration, can you highlight some of the details or refer me to some references ... thxthxdan

For the frwd PDE method itself, you can read the following papers:-Calibration and Implementation of Convertible Bond ModelsLeif Andersen and Dan Buffum- A Note on Pricing weekly-path-dependent American-style Options by Backward Inductions-Risk Sensitivities of Bermuda SwaptionsVladimir PiterbargOtherwise- Mean-reverting smiles -Risk April 2002-A two-factor mean-reverting model -Risk July 2002David Beaglehole and Alain Chebanier