So when using this method to price exotic options , it's stated that we need to calculate the vanna (how vega changes with respect to change in spot prices) of the exotic option and the volga ( how vega changes with respect to change in implied vol) of the exotic option. How on earth we would do that? Cause to calculate these 2 parameters we would need the price of the exotic option in the first place? The method that I'm referring to can be seen in these images (taken from Pricing and Hedging Financial Derivatives A Guide for Practitioners by Leonardo Marroni and Irene Perdomo) : https://ibb.co/0y9M4sh and https://ibb.co/sqtYrvk

Some help would be greatly appreciated!

  • $\begingroup$ Yes, you must have a method to calculate the value of the derivative (and its Vega) in a Black-Scholes setting in the first place. Then Volga Vanna will allow you to improve on this value by taking into account the skew and term structure of vol, which Black Scholes ignores. It is not a stand alone method. $\endgroup$
    – nbbo2
    Commented Jul 23, 2022 at 6:20
  • $\begingroup$ Black Scholes type formulas are available for Barrier Options, for example. Volga Vanna could be applied to these exotics. $\endgroup$
    – nbbo2
    Commented Jul 23, 2022 at 7:29
  • $\begingroup$ So the volga and vanna of the exotic would be calculated on the basis of its black and scholes price? And then this method will allow the black and scholes price to get improved? Am I right in my understanding? $\endgroup$ Commented Jul 23, 2022 at 8:31
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    $\begingroup$ quant.stackexchange.com/a/69673 might help $\endgroup$
    – AKdemy
    Commented Jul 23, 2022 at 19:44
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    $\begingroup$ Omg thankyou so much!! The source that you linked to was quite helpful! $\endgroup$ Commented Jul 23, 2022 at 23:58


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