Hi, I want to know if it is possible to derive a skew surface for a product which doesn't have any options traded. if yes, how is it derived??thanks

aren't the smile/skew by definition derived from market traded options ? and that too under black scholes assumptions. so it has to be a specialized options exchange. also some people consider that smile/skew surfaces come due to no arbitrage in the options market. so if u dont have an options market u dont have a smile or a skew. but if anything is still possible i wud luv to hear abt it.

QuoteOriginally posted by: bmanasHi, I want to know if it is possible to derive a skew surface for a product which doesn't have any options traded. if yes, how is it derived??thanksThe skew/smile is a graph/function of how implied vol (in the Black Scholes model) changes as the strike moves away from At The Money.If no options are traded, you cannot recover an implied vol, and hence cannot recover a skew.

QuoteOriginally posted by: bmanasHi, I want to know if it is possible to derive a skew surface for a product which doesn't have any options traded. if yes, how is it derived??thanksWell, you could estimate what it might be if it traded. Pick a traded product which is similar. Make adjustments for the differences.Probably better: create a regression model from the listed market, explaining the skew characteristics with various explanatories,say VIX characteristics, volatility, beta, industry, market cap, etc, etc. Now apply your model to the target security.What are the 'skew characteristics'? Maybe a parameterized fit, like Gatheral's SVI model. Or maybe a parameter fit to a favorite (and good) model. One warning: in equities, indices and individual names are different animals. Miss an important explanatory and this wholeexercise is useless. Example: say your target security is a new biotech with a drug in clinical trials. If the critical dates relating to thetrial results are not explanatories, you've wasted your time.

thanks a lot for the explanations.