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Just curious what's the actual reason of having an accurate option pricing model? For e.g. an option pricing model fits the volatility surface incredibly well, then what? Do practitioners actually use complicated pricing model in the financial market to price their option then decide to whether to long or short?

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    $\begingroup$ Accurate pricing is used for investment banks that sell/buy options: they provide a service to investors, thus their goal is to provide that service at the most rational price, they are not trying to anticipate market moves. $\endgroup$ Jan 6 '20 at 13:38
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Derivatives pricing models are not predictive. They simply extract information about the market’s expectations embedded in the prices of market instruments to which they are calibrated. This information can then be used to price other more complex derivatives.

Calibration is important for hedging purposes. Suppose you ask your model for the hedging ratio of a stock option with a listed strike and expiry. The most natural hedge is simply to buy the option on the market, so your model should tell you "buy 1 option with that strike and expiry". However, if your model does not exactly fit the option's market price, there is no reason it should give you that hedge ratio.

If you can't trust your pricing model for risk-managing vanilla instruments, let alone exotic instruments with complex volatility & correlations risks that are typically hedged with vanillas.

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