a4 - Exotic options [April 4] Weve looked at I European and...

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Unformatted text preview: Exotic options [April 4] Weve looked at I European and American Calls and Puts I European options with general payoff functions From a theoretical point of view. This could be carried further, to more Exotic or Path Dependent options. For example I Barrier options. Eg. European call with an upper knock-out barrier: The option payoff is ( S T- K 1 ) + , but only if S t K 2 for every t T . If the barrier is breached, the option is worthless. (Cheaper than a vanilla call, as the sellers risk is capped.) I Asian options. Eg. Fixed strike Asian put: The option payoff is ( K- A ) + where A = 1 a T- a < k T S k is the average closing stock price over the a days ending at expiration. (Lowers volatility.) Exchange Traded Options Contracts: Stocks [Apr 4] Exotics are always OTC. Pricing often takes implied volatility from exchange traded options and then plugs that into BSM to get a price for the exotic. Single Stock Calls & Puts I CBOE sells American calls and puts on a selection of stocks (1 option = 100 shares) I Montreal exchange sells the same, but for Canadian stocks. Index Calls & Puts I CBOE sells European calls and puts on a variety of stock indices: S&P, Dow, Nasdaq, Russell; Other synthetic indices too eg the VIX (volatility index)....
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This note was uploaded on 12/26/2011 for the course MATH 2281 taught by Professor Staff during the Winter '11 term at York University.

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a4 - Exotic options [April 4] Weve looked at I European and...

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