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In my job as FX trader we use as option pricer a variant of B&S.

We use that model for “accounting” purpose, i.e. for storing the daily P&L of the portfolio, and also for control the trading limits in term of greeks.

This make sense to me because FX options are OTC instruments.

However, I’ve never understood why we need a pricer for options traded on the exchange, eg equity option: in that case we could simply store the P&L based on the market value of the option.

Can you explain to me what I’m missing?

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  • $\begingroup$ You are doing something called mark to model, calculating prices and P&L based on the output of your model. As an extension, you would trade if your model predicts a different price compared to market prices. You would improve your model over time if your mark to model P&L are negative most of the times, and use it for risk management as you said. $\endgroup$ – nimbus3000 Aug 14 '19 at 15:23
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    $\begingroup$ can you explain a little more in detail please? $\endgroup$ – luca dibo Aug 14 '19 at 15:25
  • $\begingroup$ You mention the greeks. These have to come from a model. The simplest approach is to start from the market prices, compute the IV, and from the IV compute the greeks (the price can also be computed, but it will be the market price again, of course). $\endgroup$ – Alex C Aug 14 '19 at 16:07

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