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.