MGTC71-12 - Definition Any derivatives that is not European...

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MGTC71-Lecture 12 Exotic Options Ata Mazaheri 2 Definition • Any derivatives that is not European or American vanilla call or put on a single underlying S. - Some of these structured products have been standardized and are traded by vanilla option traders. • Packages • Compound options, Chooser options, Barrier option, Binary options Lookback options • Shout options • Asian options 3 Packages • Portfolios of standard options • Examples: bull spreads, bear spreads, straddles, etc • Often structured to have zero cost: One popular package is a range forward contract 4 Range Forward Contract K 1 K 2 K 1 K 2 Asset price Asset price Payoff Payoff Short Range Forward Contract Long Range Forward Contract 5 Compound Option • Option to buy or sell an option – Call on call – The right to buy a call at time T 1 . If exercised the long will have to pay the strike price (K 1 ) and receive the option to buy at T 2 at a strike price of (K 2 ) – Put on call – Call on put – Put on put • Can be valued analytically • Price is quite low compared with a regular option 6 Chooser Option “As You Like It” • Option starts at time 0, matures at T
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MGTC71-12 - Definition Any derivatives that is not European...

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