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Exotic options

Exotic options. Barrier options Asian options Lookback options Forward start options Shout options Compound options ……. Forward Start Options. An option that starts in the future. An example: a forward start call. Pricing. Pricing Model. Shout Options.

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Exotic options

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  1. Exotic options • Barrier options • Asian options • Lookback options • Forward start options • Shout options • Compound options • ……

  2. Forward Start Options • An option that starts in the future. • An example: a forward start call

  3. Pricing

  4. Pricing Model

  5. Shout Options • A shout call option: a vanilla option with an extra feature • The holder can at any time reset the strike price • The strike price becomes the asset price when resetting • The action of resetting is called “shouting”.

  6. Two questions • How to value a shout option • What’s the optimal shouting policy?

  7. Pricing Model • When shouting at time t, the option becomes an at-the-money option with Sf(t) • Let V(S,t) be the value of the shout option. Then

  8. Continued

  9. Compound Options • An option on another option • call on call • call on put • put on call • put on put • The payoff • two strike prices: X, X1 • two expiration dates: T<T1

  10. Future Options • An option on a future

  11. Pricing Model for Compound Options

  12. Others • Parisian options • Employee reload options • Asian barrier options • ……

  13. Concluding remarks(1): closed-form solutions • Available (see Kwok (1998) or Hull (1998)) • Barrier options • Geometric Asian options • Lookback options • Russian options • Forward start options • Compound options • Not available • Arithmetic Asian options • Shout options • American-style options

  14. Concluding remarks(2): • Binomial tree method • The BTM can be readily extended to all options discussed in this chapter • But it is not easy to implement for Asian options. (see Kwok (1998) for a modified BTM). • Similarity reduction • Not available for American-style fixed strike options

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