L18 - Lecture 18 Exotic Options The standard call and put...

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Lecture 18 Exotic Options The standard call and put options are usually called plain vanilla options. Many others, referred to as exotic options, are created these days and often traded over the counter. We will introduce several popular exotic options in this lecture. For simplicity, we assume the BS market although that is not necessary when defining those options in general. Packages A package is not really a new option, but a portfolio consisting of basic assets, call and put options. Such a linear combination can be easily valued by pricing separately its components. For example, a collar option is defined by the payoff ξ T = min { max { S T ,K 1 } ,K 2 } = K 1 + ( S T - K 1 ) + - ( S T - K 2 ) + at expiration T , with constants K 2 > K 1 > 0. It is a portfolio of cash and two call options. Another example is a break forward which modifies a forward contract by setting the time- T payoff ξ T = max { S T ,S 0 e rT } - K = ( S T - S 0 e rT ) + + S 0 e rT - K with strike price K > S 0 e rT . To make it comparable to a forward contract entered at time
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This note was uploaded on 11/17/2011 for the course STOR 890 taught by Professor Staff during the Spring '08 term at UNC.

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L18 - Lecture 18 Exotic Options The standard call and put...

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