How to Price Exotic Options

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Jupyter Notebook:
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General Recipe for Pricing Exotics:
1.) Select a model capable of fitting the market implied volatility surface
2.) Determine how you will produce vanilla prices in that model framework
3.) Calibrate model parameters to the market surface by the min. problem
4.) Determine how you will produce exotic option prices (similar to (3))
5.) Make adjustments to the risk-neutral price as necessary
6.) Send out that quote and make a deal

Roman
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Chapters:
00:00 - Why Pricing Matters
01:47 - Resources and Jupyter Notebook
02:52 - What is an Exotic Option
05:36 - General Recipe for Pricing Exotics
07:06 - Why Black-Scholes is Insufficient
09:30 - Beyond Black-Scholes: Local and Stochastic Volatility
11:06 - Modeling the Volatility Skew
12:40 - Implied Volatility v. Price with Local and Stochastic Volatility Models
14:08 - Pricing Solutions for European (Vanilla) Options
17:16 - Model Calibration to a Market Implied Surface
18:55 - Efficiency Concerns with (some) Pricing Solutions
19:54 - Pricing an Exotic Option
22:51 - Risk-Neutral Price Adjustments and Quoting
24:57 - Summary, Closing Thoughts, Future Topics
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