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