I have a simple replication pricing implementation for 1st gen exotics (digitals, single and double barriers, etc.). In order to effectively test strategies I want to price "like" strikes across securities and products. Where "like" just infers that I've normalized the likelihood of touch for each security, product, etc.
Some options I could use are:
- % from spot: this won't scale well across markets, securities, products.
- SDs from spot: That uses historic data instead of the implied volatility to generate strikes.
- Same delta as vanilla: This seems like a reasonable approach but only under BS assumptions.
Since exotics are normally quoted in %TV (theoretical value) I was hoping there was a standard "solve for strike" given a specific %TV value. If not, are there any other common strategies? References appreciated.
Edit: TV is theoretical value. Also for reference a bit about option contracts in FX from a text I'm referencing:
Exotic option contracts are priced in premium terms and the pricing is anchored by Theoretical Value (TV)—the CCY1% value of the exotic contract under Black-Scholes assumptions, specifically: