Table 1: Market prices (strikes and lifetimes (TTM) on the two axes)

K \TTM 1M 3M 6M 1Y 2Y 3Y
80 20.12 20.45 20.78 22.43 26.39 29.12
85 15.64 15.93 17.22 19.21 23.34 26.11
90 10.77 11.12 13.12 16.83 21.03 23.11
95 5.74 8.21 10.02 13.2 18.12 21.21
100 3.15 5.22 8.22 11.01 15.94 19.91
105 1.19 3.45 5.77 9.32 14.03 17.87
110 0.53 1.56 4.01 7.55 12.01 15.44
115 0.18 1.01 3.22 5.44 9.81 13.23
120 0.05 0.61 2.43 4.01 7.21 10.89

3 Pricing exotic derivatives that are not path-

dependent
3.1 Intro
The main philosophy of the market grid data is that it provides very use-
ful estimates for exotic derivatives prices without too much need of complex
modelling and mathematics. It also is a very useful tool for model validation
and reduction to the minimum of the model risk. (Risk of mis-pricing, mis-
calibrating, or using a wrong model or choosing the wrong set of risk factors.)

We will see in the upcoming examples what it means to mis-use pricing

models and how someone from outside could take advantage of that.

3.2 Choosing the right universe of options

The prices of exotic instruments depend on the universe of plain vanilla op-
tions available for the trading on the exchange and on their liquidity (trading
volume and open interest) which also strictly determines the prices of the
available options.

The more diversified are the options (on strikes and maturities), the more
accurate becomes the valuation and the rest of the process (monitoring the