Non-vanilla Path Dependent "exotic" Options
The following "exotic options" are still options, but have payoffs calculated quite differently from those above. Although these instruments are far more unusual they can also vary in exercise style (at least theoretically) between European and American:
- A lookback option is a path dependent option where the option owner has the right to buy (sell) the underlying instrument at its lowest (highest) price over some preceding period.
- An Asian option (or Average option) is an option where the payoff is not determined by the underlying price at maturity but by the average underlying price over some pre-set period of time. For example an Asian call option might pay MAX(DAILY_AVERAGE_OVER_LAST_THREE_MONTHS(S) − K, 0). Asian options were originated in Asian markets to prevent option traders from attempting to manipulate the price of the underlying security on the exercise date.
- A Russian option is a lookback option that runs for perpetuity. That is, there is no end to the period into which the owner can look back.
- A game option or Israeli option is an option where the writer has the opportunity to cancel the option he has offered, but must pay the payoff at that point plus a penalty fee.
- The payoff of a Cumulative Parisian option is dependent on the total amount of time the underlying asset value has spent above or below a strike price.
- The payoff of a Standard Parisian option is dependent on the maximum amount of time the underlying asset value has spent consecutively above or below a strike price.
- A barrier option involves a mechanism where if a 'limit price' is crossed by the underlying, the option either can be exercised or can no longer be exercised.
- A double barrier option involves a mechanism where if either of two 'limit prices' is crossed by the underlying, the option either can be exercised or can no longer be exercised.
- A Cumulative Parisian barrier option involves a mechanism where if the total amount of time the underlying asset value has spent above or below a 'limit price', the option can be exercised or can no longer be exercised.
- A Standard Parisian barrier option involves a mechanism where if the maximum amount of time the underlying asset value has spent consecutively above or below a 'limit price', the option can be exercised or can no longer be exercised.
- A reoption occurs when a contract has expired without having been exercised. The owner of the underlying security may then reoption the security.
- A binary option (also known as a digital option) pays a fixed amount, or nothing at all, depending on the price of the underlying instrument at maturity.
- A chooser option gives the purchaser a fixed period of time to decide whether the derivative will be a vanilla call or put.
- A forward start option is an option whose strike price is determined in the future
- A cliquet option is a sequence of forward start options
Read more about this topic: Option Style
Famous quotes containing the words path, dependent and/or exotic:
“The path was a vague parting in the grass
That led us to a weathered windowsill.
We pressed our faces to the pane. “You see,” he said,
“Everything’s as she left it when she died....””
—Robert Frost (1874–1963)
“It is possible to make friends with our children—but probably not while they are children.... Friendship is a relationship of mutual dependence-interdependence. A family is a relationship in which some of the participants are dependent on others. It is the job of parents to provide for their children. It is not appropriate for adults to enter into parenthood recognizing they have made a decision to accept dependents and then try to pretend that their children are not dependent on them.”
—Donald C. Medeiros (20th century)
“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)