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In my problem I have a liquid underlying, whose derivatives are not quoted and therefore the option market is illiquid. For this reason I can't get the implied volatilities and calibrate my model in order to obtain the fair value of derivatives.

This is often the case in the commodities industry. How can I estimate the implied volatilities?

I just make a fictitious example to better explain:

  • I am trading palm oil in Thailand, which is very liquid and is quoted in real time.
  • I would like to buy and sell simple European Calls or Puts in order to hedge myself. However they are not quoted in the market, and I have to decide their fair price. How do I do?
  • The futures are quoted.
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  • $\begingroup$ I suppose in such a case you have to look at historical volatilties of the underlying. $\endgroup$
    – nbbo2
    Mar 22, 2017 at 11:00
  • $\begingroup$ Are you able to request a quote from the counterparty you would be dealing with? $\endgroup$
    – amdopt
    Mar 22, 2017 at 13:10
  • $\begingroup$ @amdopt Yes but how do they quote it in the first place? $\endgroup$
    – NSZ
    Mar 22, 2017 at 13:21
  • $\begingroup$ @NSZ I assume it will be a similar process as one that you will have to use. You will have to model IV or try to use HV like noob2 suggested. You might as well ask for a quote and give yourself a baseline though. You will have to request a quote anyway before placing an order... $\endgroup$
    – amdopt
    Mar 22, 2017 at 13:34

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