Paul, I remmeber you stated in a paper something like: "Explicit formulas are almost only used for regular B&S, like calls & puts, i.e. never for barriers where its higly dangerous with constant volatility". But, what assumptions and modells do you recommend in those cases then?

need to handle smile and skew ... a stoch vol model would be the first cut

Yes but,..How do you handle Barrier option in a stochastic volatility setting? which pricing algorithms ?

Why would the potential error be more dangerous in a pathdependent, like barrier, than for a regular call/put then?

One of the big problems is when the option value has a gamma that changes sign (with asset price for example). The price is then very sensitive to the vol model, in particular how you interpret/use skews.P

Paul, I've been thinking a bit more on the subject. And, I see what you mean, looking at i.e. a up&out: its indeed very sensitive too what volatility one quotes. And especially, it also depens un where the barrier is in relation too the current spot price. Far away you want the vol to bee high, but of course the value decreases witgh higher vol. near the barrier. So, you could of course price in a stoch vol environment. But, how usable are these models, I mean isnt predicting the parameters "a real pain in the as" (considering the uncertainty, I mean, is there such a thing as stable correlations or smile for the vol)? The voll often seems to be clustering, soo I think it shoud be possible too come up with a model which is sort of "state dependent"? But, purhapse its even more simple too have an idea of a "volatility band", i.e. like " the vol stays in the range x-y with some probability". But know, that woudnt help, since no one would trade with you on that basis. So, the practioners has to have some kind of optimal replication strategy (like the ideas of static hedging) ?!??

goshawk, you are correct in that static hedging is very important with contracts like these (not vanilla, yet not too exotic). Profit margins are tight therefore the model and the hedge need to be as good as possible.P