"Exotic" Options With Standard Exercise Styles
These options can be exercised either European style or American style; they differ from the plain vanilla option only in the calculation of their payoff value:
- A cross option (or composite option) is an option on some underlying asset in one currency with a strike denominated in another currency. For example a standard call option on IBM, which is denominated in dollars pays $MAX(S−K,0) (where S is the stock price at maturity and K is the strike). A composite stock option might pay JPYMAX(S/Q−K,0), where Q is the prevailing FX rate. The pricing of such options naturally needs to take into account FX volatility and the correlation between the exchange rate of the two currencies involved and the underlying stock price.
- A quanto option is a cross option in which the exchange rate is fixed at the outset of the trade, typically at 1. The payoff of an IBM quanto call option would then be JPYmax(S−K,0).
- An exchange option is the right to exchange one asset for another (such as a sugar future for a corporate bond).
- A basket option is an option on the weighted average of several underlyings
- A rainbow option is a basket option where the weightings depend on the final performances of the components. A common special case is an option on the worst-performing of several stocks.
- A Low Exercise Price Option (LEPO) is a European style call option with a low exercise price of $0.01.
- A Boston Option is an American option but with premium deferred until the option expiration date.
Read more about this topic: Option Style
Famous quotes containing the words exotic, standard, exercise and/or styles:
“I do not approve of anything that tampers with natural ignorance. Ignorance is like a delicate exotic fruit; touch it and the bloom is gone.”
—Oscar Wilde (1854–1900)
“A disposition to preserve, and an ability to improve, taken together, would be my standard of a statesman.”
—Edmund Burke (1729–1797)
“The belief of our Reason is an Exercise of Faith, and Faith is an Act of Reason.”
—Joseph Glanvill (1636–1680)
“Can we love our children when they are homely, awkward, unkempt, flaunting the styles and friendships we don’t approve of, when they fail to be the best, the brightest, the most accomplished at school or even at home? Can we be there when their world has fallen apart and only we can restore their faith and confidence in life?”
—Neil Kurshan (20th century)