Common Exotic Option Models in Equity, FX, and Interest Rates

Summary

The document gives a brief overview of models commonly used to price exotic options across asset classes. For equity and foreign exchange products, it identifies local stochastic volatility models as a widely used family. It says individual firms may implement their own variations, suggesting that there is no single uniform specification across the industry.

For interest rate exotics, the answer describes variants of the SABR model as a standard choice, while noting that broader local stochastic volatility approaches may be gaining adoption. The response is deliberately concise: it does not specify which model fits a particular exotic, explain calibration, compare pricing accuracy, or address whether a closed-form solution or Monte Carlo simulation is appropriate. Its guidance is therefore a high-level account of prevailing practice, not a complete model-selection framework.

Key ideas

• Local stochastic volatility models are described as common for equity and FX exotics.
• Implementations of local stochastic volatility can differ between firms.
• Variants of SABR are identified as standard models for interest rate exotics.
• More general local stochastic volatility models may also be gaining traction in rates.
• The document does not compare calibration methods or numerical pricing techniques.

Tags

# What is market standard model in equity, FX and interest rates exotics?


# What is market standard model in equity, FX and interest rates exotics?












Is there any industry consensus about the model to use for pricing exotics in equity, FX and interest rates? I assume that for vanilla options they all use Black model, but how about exotics?

Also, for those standard models applied to exotics, do they have closed form solutions like Black & Scholes or they all use Monte Carlo simulations to generate paths for the underlying and the stochastic volatility?

## Answer by user34971 (score 3, accepted)

https://quant.stackexchange.com/a/44438

In equity and FX it's LSV (local stochastic volatility) models, with each shop probably using their own LSV twist/flavour.

In rates I believe (variations on) SABR is still the standard, but more general LSV models may be catching on there as well.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.