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I'm trying to price autocalls.

In theory my pricing method is ok (I followed Bouzoubaa's book procedure) but I'm not sure I read anything on calibration of autocalls. Basically my question is what part of the vol surface should I use ? My coupon digits can range from 50% to 90% and the same range for the put down and in barrier.

Let's say i do 2 pricings. First one coupon barrier 50%, second one coupon barrier 80%. The put remains the same, strike 100%, barrier 80%. Should I calibrate 2 different models ? I mean, first one I should use vol surface with strike ranging from 50% to 100% and second one, the surface from 80 to 100% ?

I'm simulating Monte Carlo paths with Heston model, in case this could be relevant

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Your model ideally should be calibrated to all autocalls in your portfolio , as hedging is usually done on portfolio level.

Autocalls have sensitivity to KI barrier, and KO barrier (autocall level, kinda digital option thus high sensitivity to vol surface near the KO level).

KI Barrier is more important then strike level. Thus your model should ideally be calibrated from below lowest KI barrier to higher than highest Autocall level in autocall portfolio.

Make sure that Vol surface is smooth near KI and KO levels. And for calibration you can put more weights to vol points near KI barrier levels and KO levels.

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  • $\begingroup$ How does one calibrate to autocallables? Where are you getting your secondary prices? $\endgroup$ – will Apr 4 '20 at 20:08

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