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:
“If a man can write a better book, preach a better sermon, or make a better mouse-trap, than his neighbor, though he build his house in the woods, the world will make a beaten path to his door.”
—Ralph Waldo Emerson (1803–1882)
“It is vain to expect virtue from women till they are, in some degree, independent of men ... Whilst they are absolutely dependent on their husbands they will be cunning, mean, and selfish, and the men who can be gratified by the fawning fondness of spaniel-like affection, have not much delicacy, for love is not to be bought, in any sense of the words, its silken wings are instantly shrivelled up when any thing beside a return in kind is sought.”
—Mary Wollstonecraft (1759–1797)
“Anthropology has always struggled with an intense, fascinated repulsion towards its subject.... [The anthropologist] submits himself to the exotic to confirm his own inner alienation as an urban intellectual.”
—Susan Sontag (b. 1933)