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FDFE > Lecture 8: Exotic options > Flashcards

Lecture 8: Exotic options Flashcards

1
Q 
Exotic options:
- ?? & ? options
- traded ?
- advantages:
> help manage ? that can't be easily handled by plain vanilla options like European and American
> ?
> avoid regulation
> exploit expectation
A 
Exotic options:
- non-standard & customised options
- traded OTC
- advantages:
> help manage risks that can't be easily handled by plain vanilla options like European and American
> cheaper
> avoid regulation
> exploit expectation
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2
Q

Asian options:
Payoff depends on ?? of u.a. during option’s life => ‘?dependent’
- usually worth ? than equivalent plain vanillas bec average price of u.a. is ? volatile

A
  1. Asian options:
    Payoff depends on average price of u.a. during option’s life => ‘path dependent’
    - usually worth less than equivalent plain vanillas bec average price of u.a. is less volatile
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3
Q

2 types of Asian options:

  • ’??’: average price of u.a. = ? price in payoff
  • ’??’: average price of u.a. = ? price in payoff
A

2 types of Asian options:

  • ‘Average strike’: average price of u.a. = strike price in payoff
  • ‘Average price’: average price of u.a. = asset price in payoff
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4
Q

Asian options - Types & Payoff:

  1. Average price call: Max( ???, 0)
  2. Average price put: Max ( ???, 0)
  3. Average strike call: Max ( ???, 0)
  4. Average strike put: Max ( ???, 0)
A
  1. Asian options - Types & Payoff:
  2. Average price call: Max( S_average - K, 0)
  3. Average price put: Max ( K - S_avg, 0)
  4. Average strike call: Max ( S_T - S_avg, 0)
  5. Average strike put: Max ( S_avg - S_T, 0)
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5
Q

Bermudan options:
Exercise is restricted to particular ? or in a period.
- ? (?) flexible than European (American)
=> price is ? (?) than European (American)

A
  1. Bermudan options:
    Exercise is restricted to particular dates or in a period.
    - More (less) flexible than European (American)
    => price is higher (lower) than European (American)
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6
Q

Barrier options: either comes into existence (‘Knock in’) or ceases to exist (‘Knock out’) if an agreed barrier is reached.

A
  1. Barrier options: either comes into existence (‘Knock in’) or ceases to exist (‘Knock out’) if an agreed barrier is reached.
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7
Q

Rebate Barrier options: make a fixed payment if the barrier is hit during option’s life

A
  1. Rebate Barrier options: make a fixed payment if the barrier is hit during option’s life
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8
Q

Barrier Options will never pay off more than plain vanilla.
=> less expensive
but still allows us to hedge in a similar way as plain vanillas with extremes removed.

A
  1. Barrier Options will never pay off more than plain vanilla.
    => less expensive
    but still allows us to hedge in a similar way as plain vanillas with extremes removed.
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9
Q
  1. Chooser options:
    After a specified time during option’s life, option holder can choose whether the option is a call or put.
    - whether it’s a put or call is determined by Max (c, p)
    => moneyness is key.
A
  1. Chooser options:
    After a specified time during option’s life, option holder can choose whether the option is a call or put.
    - whether it’s a put or call is determined by Max (c, p)
    => moneyness is key.
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10
Q
  1. Lookback options:
    Payoff = Minimum or Maximum asset price during option’s life.
    e.g. Lookback call allows holder to buy u.a. for its lowest trading price.
    - useful if trader knows they have to buy/ sell u.a.
A
  1. Lookback options:
    Payoff = Minimum or Maximum asset price during option’s life.
    e.g. Lookback call allows holder to buy u.a. for its lowest trading price.
    - useful if trader knows they have to buy/ sell u.a.
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11
Q
  1. Gap options:
    Consider a plain - vanilla call:
    Payoff = Max (S_T - K, 0)
    Range payoff = (S_T > K)
    Magnitude of payoff = S_T > K
    => K determines plain - vanilla ‘s range and magnitude.
    - Gap options separate these, e.g. payoff of Gap = S - 90 when S >= 100.
A
  1. Gap options:
    Consider a plain - vanilla call:
    Payoff = Max (S_T - K, 0)
    Range payoff = (S_T > K)
    Magnitude of payoff = S_T > K
    => K determines plain - vanilla ‘s range and magnitude.
    - Gap options separate these, e.g. payoff of Gap = S - 90 when S >= 100.
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12
Q
  1. Gap option:
    The term ‘option’ for a gap put can be misleading because in certain situations (see graph in notes) gap option ? requires holder to pay additional amount.
A
  1. Gap option:
    The term ‘option’ for a gap put can be misleading because in certain situations (see graph in notes) gap option unexercised requires holder to pay additional amount.
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13
Q
  1. Gap options still attractive bec it fully protects the holder if loss > particular amount and gap options are cheaper than plain vanillas.
A
  1. Gap options still attractive bec it fully protects the holder if loss > particular amount and gap options are cheaper than plain vanillas.
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14
Q
  1. Compound options: an option on an option:
    Call on Call
    Call on Put: right but not obligation to buy the right but not obligation to sell u.a.
    Put on Call
    Put on Put
A
  1. Compound options: an option on an option:
    Call on Call
    Call on Put: right but not obligation to buy the right but not obligation to sell u.a.
    Put on Call
    Put on Put
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15
Q
  1. Value of Compound Call = Max ( c - X, 0)

X: strike price of compound, i.e. price at which holder can buy or sell u.a.

A
  1. Value of Compound Call = Max ( c - X, 0)
    X: strike price of compound, i.e. price at which holder can buy or sell u.a. => similar to option premium of a plain-vanilla.
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16
Q
  1. Compound options - Exercise decision depends on critical price of stock, S1.
    S1 must be big enough to make underlying option at least as valuable as corresponding plain vanillas.
A
  1. Compound options - Exercise decision depends on critical price of stock, S1.
    S1 must be big enough to make underlying option at least as valuable as corresponding plain vanillas.
17
Q
  1. Other exotic options:
    - Exchange options: pays off if u.a. outperforms a benchmark.
    e. g. right to obtain a unit of S&P500 by giving up a unit of FTSE100
A
  1. Other exotic options:
    - Exchange options: pays off if u.a. outperforms a benchmark.
    e. g. right to obtain a unit of S&P500 by giving up a unit of FTSE100
18
Q
  1. Other exotic options:
    - Shout options: Holder has an opportunity to contact writer at 1 point during option’s life (‘Shout date’)
    Payoff of Shout Call = Max ( S_T - K, S_S - K)
A
  1. Other exotic options:
    - Shout options: Holder has an opportunity to contact writer at 1 point during option’s life (‘Shout date’)
    Payoff of Shout Call = Max ( S_T - K, S_S - K)
19
Q
  1. Other exotic options:

- All-or-nothing (binary) options: pay off a fixed amount or 0

A
  1. Other exotic options:

- All-or-nothing (binary) options: pay off a fixed amount or 0

20
Q
  1. Other exotic options:

- Rainbow options: an option on a basket of u.a.

A
  1. Other exotic options:

- Rainbow options: an option on a basket of u.a.

FDFE (10 decks)

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