I have two different questions1. Which one is better for pricing an exotic structure (with 100% capital protection) -closed form solution? or montecarlo? or binomial model? 2. Is it possible in realty to replicate the pay-off of 100/140 call spread on an underlying whose option contract doesn't exist? The first question I have asked in technical forum but could not get any elaborate answer. I thought here I might get something..:-)My question may be very novice in nature but please forgive me as I am new to this quantitative finance.Plz reply.

1. it depends on how exotic it is ... you need to elaborate more to get a more elaborate answer2. deeply philosphical question - plenty of discussions here on dynamic replication. in theory yes

Quote2. deeply philosphical question - plenty of discussions here on dynamic replication. in theory yesExcuse me for being pedantic, Dave. In theory: Depends on the model.

Risking being too practical about it:(a) if you have no clue how the asset price could develop, your "replication strategy" will be a huge bet with uncertain outcomes (i.e. start-up company with no correlation to anything)(b) if you have reasonable idea of how asset price could develop, your "replication strategy" will be a bet with hopefully some certainty of possible outcomes (i.e. stable historical vol, but no listed options)(c) if the underlying asset is systematically linked (i.e. correlated) with other assets that have tradable options, good chance of dynamic replication, risking breakdown of correlation assumption (i.e. quanto options, basket options etc)Of course your replication will always be model dependent, so the further away your assumptions are from reality (even unknowingly), the worse your performance is going to be, in hindsight.

@DaveAngel - Lets say I would like to price an single barrier option with the following specs. Mat - 3 yr KO - 165, Rebate - 60 and it is a KO up call option you can assume r as 8% and div. yield as 1.5% If KO is not hit then participation : 110% fully principal protected@Ziggy: Thanks for your clarity. Here I'm talking abt two equity indices which are highly correlated. if one index is having tradable options should we implement the dynamic replication strategy using that index? Suppose index A has tradable option which are highly liquid. In order to deliver the desired pay-off on index B, Shall we use index A for replication?

a 3-year CCy Leverged capital protected Put Spread On x/y IndexNumerix is a great tool for priicng such structures,you can build your model in excel by objects from scratsh and hook it up to Bloomberg for all the Calibrations and stuff.if you want to code this by yourself,the best way forward is a MC.