Most emerging/frontier markets have no or very thinly traded volatility surfaces for their equity markets (single name and indices alike), furthermore, they usually have restrictions on Short-Selling and Capital Controls


How would you approach pricing/EoD MtM for simple european calls/puts in this market conditions? I'm interested in the heuristics/thought process, any practical experience and any literature.

What I've got so far:

  1. Replication/cost of hedging... hindered by some of the restrictions on short selling
  2. Find a correlated asset that has the desired attributes (liquid spot/Vol and short selling) use this as a proxy
  3. Use the underlying's historical spot market data:
  • Using simple realized volatility and econometric projections.
  • Deduce a historical distribution single or rolling.




  • 1
    $\begingroup$ This might help a bit quant.stackexchange.com/questions/55317/… $\endgroup$
    – ir7
    Jul 16, 2020 at 23:36
  • $\begingroup$ Hi @ir7 thank you for taking the time to comment and for the reference, indeed this is the same question in a different context, so very helpful. I also wanted to follow up and ask you if you had any practical experience implementing some of this approaches and if you could comment a bit about it. $\endgroup$
    – Mercadian
    Jul 17, 2020 at 16:47

1 Answer 1


I think your list covers the approach quite well. What I would add to point 3(i) is that there is a (generally positive) spread of implied vols to realized vols. In this case what might be useful is to combine point 2 with point 3(i) i.e. ascertain the implied/realized spread from the proxy market and apply that to the realized vol obtained from your historical underlying data.

  • $\begingroup$ Hi @user35980, thank you for taking the time to answer, really appreciate it. I wanted to follow up and ask you if you had any practical experience implementing some of this approaches and if you could comment a bit about it. $\endgroup$
    – Mercadian
    Jul 17, 2020 at 16:54
  • 1
    $\begingroup$ Yes - in the very illiquid EM rates vol market. For treating eastern european ccys like PLN, CZK back in the day we would use the EUR swaption market as a proxy (because at that time convergence of these countries into the EU was an important factor). We would use the EUR realised/implied spreads (for swaptions, caps floors, even CMS) and apply them to the delivered rates vol for PNL, CZK (they had a decent bond/swaps market). The desk captured revenue and market share through this approach so I guess it wasn't all bad! These days PC/compliance may need more convincing of such an approach. $\endgroup$
    – user35980
    Jul 18, 2020 at 11:32
  • $\begingroup$ Hi @user35980, thank you again for taking the time and for sharing your experience, sounds like you were part very interesting project! I can definitely see the application very clearly. I wanted to ask a couple of follow ups regarding the process itself, if you could comment on: -1) Did you compute a spread on top of the surface itself? ATM only? Smile? -2) How did you approach the Calc of the realized vol? single or multiple vals? -3) Did you Split vol greeks in terms of spread and EUR vol risk? If you have any literature/references it'd love to read those. Thank you! $\endgroup$
    – Mercadian
    Jul 21, 2020 at 14:20

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