HiI'm confused with the question listed on topic. Our FX exotic option traders want me to provide a model which can catch market quote well. Once they get a model consitsent with market , they can pricng/Hedging/MTM under this model. Therefore, I was asked to look into Superderivatives since their price is much close to market . However, I doubt about that. Some guys in this forum told me they use different models at the same time to compare with market quotes, if that's the case, how can we decide the uniform model for pricing / hedging / MTM ?

It is reasonable to use consistent models for pricing / hedging / and MTM since they all boil down to actual P&L which Traders want to pin point.Although market quotes may reflect the price to unwind, it is not the only pricing model to be used.You need some other pricing model (particularly zero arbitrage stuff) to do other stuff like create trading ideas, calculate economic value, etc.

Hi jonmi,Thanks for ur kindly reply. Actually a UBS trader told me their european option positions are MTM with ATM volatility in spite of market traded with a smile. I am puzzled about that . Recently I am looking into exotic option pricing, the same question raised again. Since it's much complicated in exotic world. We can use many models, say analystic, SV, jump...., to get exotic prices. Should we adopt a uniform model while pricing/Hedging/MTM ??

I actually don't know. It depends on the institution I guess.Just recently we are unwinding a leveraged credit linked deal and even bid offer rates (accounting valuation and MTM done at mid) has a significant impact on the unwind price. There's no right or wrong but the traders wanted to use consistent models so that there will be no surprises. But you can't avoid that.

For exotic deals, several models may be necessary in order to judge model risk elements.For European style options, the "model" is essentially the volatility parameter corresponding to expiry and tenor (and possibly e.g. a stoch vol model on top of that, but this still needs sensible volatility input). Here, traders often have to mark their book to market, but a traders fair view may be influenced by his/her positions, especially if the book is not balanced. This phenomenon can e.g. be judged from Totem volatility data, which show how traders (on average) mark their books, rather than showing market (broker) quotes. The point is that M2M vol quotes may be biased relative to "market" broker quotes.