Lecture 8 Supplementary Part 2

Exocopons ataxonomyofexocoponscompoundopons

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Unformatted text preview: mpound Op'on is max[C(S,K,T‐t1) – X, 0] Expira'on of Underlying Op'on (if Compound Op'on exercised) 1 Supplementary Slide 2 2. Exo'c Op'ons A Taxonomy of Exo'c Op'ons – Compound Op'ons Textbook pp 453‐457: •  Example: CallOnCall Op1on (Call to buy a call) t0 Buy Compound Op'on (i.e. the right to pay X for a European Call at strike K at 'me t1) •  t1 T Decision to exercise Compound Op'on. •  If exercise, receive op'on of price C(S,K,T‐t1) at price X. •  Value of Compound Op'on is max[C(S,K,T‐t1) – X, 0] Expi...
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