exotic options and other nonstandard options
package
Components: a portfolio consisting of standard European calls and puts, forward contracts, cash and underlying assets
Why these options exist?
for tax, accounting, legal or regulatory reasons
to meet manager's future speculation
designed by financial engineers in investment banks, to maximise the profits
traded over the counter (can be tailored to meet requirements), and almost zero initial costs
types of package: (etc.)
bear spreads
butterfly spreads
calendar spreads
straddles
strangles
zero initial cost (=! zero payoff or zero risks or zero loss ⚠)
range-forward contracts // if the two strike price is identical, the spreads turns to a short (or long for bull spreads) in forward contract
non-stander American options
early exercise may be restricted to certain dates // a Bermudan option
early exercise may be allowed during only part of the life of the option
strike price may change during the life of the option
value this using the binomial trees, and text the early exercise in each node.
forward start options
options start at some time in the future
the option is at-the-money when starts (strike = spot)
compound option
two strike prices and two exercise dates
four types of compound options:
call on call
call on put
put on call
put on put
a compound option is generally much more sensitive to volatility than a plain vanilla option ⚠
chooser options
give the holder of the options the right to choose after a specific period of time whether the options is call or put
value of chooser option := max(c,p) 🚩
barrier options
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