19) Exotic Options Flashcards
Why might exotic options present an opportunity to make money
- Attract new business
- Insert clauses to our advantage
What are some examples of exotic options
- Asian – exercise price based on the average share price over a given time interval
- Lookback – exercise price based on the maximum/minimum over a given time interval
- Bermudan – can be exercised on particular dates only
What is an Asian Option
A contract giving the holder the right to buy or sell an underlying asset (e.g. a share) for its average price over a prescribed time interval
What is the average of the share price S over the time interval [0, T]
What is a floating strike asian option
Uses the share price S as the underlying asset and the average share price A(T) as the exercise price
What is the payoff of a floating strike asian option
What is the payoff of a fixed strike asian option
How is the Black-Scholes model adapted to handle Asian options using the integral of the stock price
How is the modified Black-Scholes equation for an Asian option derived using an adapted version of Itô’s Lemma