FX Options and Structured Products

In Foreign Exchange Options markets first generation exotics like barrier and touch options have become vanilla-like commoditized derivatives traded in a liquid market. We review some of the traditional vanna-volga models frequently used by practitioners and software vendors, demonstrate their pros and cons, determine consistency and design requirements as well as limitations. We show how recent trends try to overcome the inconsistencies with stochastic-local volatility hybrid models (SLV). We provide an overview of such models used in the market and show by case studies how they relate to vanna-volga based approaches.