Options when there's no VolSurf - Emerging/Frontier Markets

Question

Context:
Most emerging/frontier markets have no or very thinly traded volatility surfaces for their equity markets (single name and indices alike), furthermore, they usually have restrictions on Short-Selling and Capital Controls
Question:
How would you approach pricing/EoD MtM for simple european calls/puts in this market conditions? I'm interested in the heuristics/thought process, any practical experience and any literature.
What I've got so far:

Replication/cost of hedging... hindered by some of the restrictions on short selling
Find a correlated asset that has the desired attributes (liquid spot/Vol and short selling) use this as a proxy
Use the underlying's historical spot market data:

Using simple realized volatility and econometric projections.
Deduce a historical distribution single or rolling.

Thx!
M
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user35980 · Answer

I think your list covers the approach quite well. What I would add to point 3(i) is that there is a (generally positive) spread of implied vols to realized vols. In this case what might be useful is to combine point 2 with point 3(i) i.e. ascertain the implied/realized spread from the proxy market and apply that to the realized vol obtained from your historical underlying data.

Answered by user35980 on October 27, 2021

Options when there's no VolSurf - Emerging/Frontier Markets

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