Is there any industry consensus about the model to use for pricing exotics in equity, FX and interest rates? I assume that for vanilla options they all use Black model, but how about exotics?
Also, for those standard models applied to exotics, do they have closed form solutions like Black & Scholes or they all use Monte Carlo simulations to generate paths for the underlying and the stochastic volatility?
Answer
In equity and FX it's LSV (local stochastic volatility) models, with each shop probably using their own LSV twist/flavour.
In rates I believe (variations on) SABR is still the standard, but more general LSV models may be catching on there as well.
No comments:
Post a Comment