Black Scholes vs implied volatility tree

[sle]

Quote from ThetaSpec:

Thanks for your insight. It was more of a philosophical question. I also wonder how much of a liquidity premium one should price in, when checking exotic derivatives quotes from the counterparties? In the example above you mentioned 20-30%? It has to be an exception rather than the rule. What do you do, if you don't mind me asking?

It's less of a liquidity premium and more of people being more conservative on things that not as transparent. Liquidity in the exotics market is a bit of a web of deception - you might see something in the brokers market but then the bid/offer will dissapear or they would do it in micro size. So you rarely count on being able to get rid of this specific product but rather try to be conservative in your assumptions - correlation, jumps, etc.