Chapter 14 Exotic Options Flashcards
Exotic Options are
options that use some combination of our basic options or are some variant of of our basic option
Asian Options are
options where stock price or strike price is based on either the geometric or arithmetic average.
Hedge an Asian Option by
buying an opposite position in a strip of basic options
Compared to a basic European Call or put an average strike Asian call option as number of averages increase
more expensive
Compared to a basic European Call or put an average price Asian call option as number of averages increase
less expensive
What is a barrier Option
underlying must hit a barrier then it becomes like a normal call or put
is a barrier more or less expensive than a normal option
less expensive becuase it will only pay off if the the underlying hits a barrier first.
knock-out options
options that get knocked out of existence if the barrier is reached
knock-in options
options that get knocked into existence if the barrier is reached
rebate options
options that pay a fixed amount if the barrier is reached
describe a normal option in terms of barrier options
knock-in option + knock-out option with same strike and time until maturity
Compound Option
Option where the underlying is an option
what must be true to exercise a compound option
value of underlying option is greater than strike price because of high stock price
Gap options is
when strike and pay trigger are different for an option, note that for a pay trigger, you must pay even if you lose money.
pricing a gap option is
the Black-Scholes with pay trigger in d1
