QuoteOriginally posted by: cpengtohHave you attempt to build similar models yourself ?No i'm not a quant (despite my nickname!), i'm on a trading desk.I just looked at SuperDerivatives to compare its performance with our own pricing modelYoure working as an FX quant?MaTT - not sure if this is what you're looking for, but you can have a look at this paper:http://www.mathfinance.de/wystup/papers ... esweek.pdf

Matt, The ref which quantstudent19 referred to is probably the only other publicely available article on the 3 vanilla replication method. As the fudge is proprietary to each bank, you probably won't find any more detail ones.quantstudent19, I do some FX quant stuff among other things. We have superd as a backup pricer and since they are more active in calibrating their fudges to the market, we also look at their prices regularly for comparison.

quantstudent19: thanks for the linkcpengtoh: what confuses me the most is the term "fudge" and its meaning... could you tell me some more about itThank you for your patience Regards,MaTT

The fudge is a modification of the Black Scholes value to get a price closer to the market.For example if all options traded at Black Scholes + 5 bp, Fudge would be + 5 bp. Unfortunately, this is not the case!Some fudges have a mathematical basis (based on dvega/dspot and dvega/dvol for example) or might be more empirical ("add 10% to the price of a certain type of option").You can also fudge more sophisticated models (fudge of stoch vol, etc...)No mathematical model will give you exactly the price traded in the market. That's why you try to modify these models, with a fudge based on market observations.Hope it was clear...

OK, now it's clear , thanks,MaTT