A lookback option pays according to the highest value reached by the underlying during the contract period. Structured products are financial instruments that were created to satisfy a need for hedging under specific circumstances, and usually involves the use anglorand forex derivatives. If the underlying asset is below the strike at expiration, the trader will not receive anything. Information is shared about your use of this site with Google.
The maximum potential loss for the long trader is the premium paid for the option. Down-and-in-option is very likely to be active should the underlying prices of the stock go below the marked barrier. Best-of-two options depends on 2 different securities or indexes; and better-of-two options pays off according to the better performing security or index.
Most binary options are not classified as puts or calls. Asian Options Asian options have a payoff based on the average price of the underlying on a few specific dates. Compound options come in four types: Exotic options, traded in the OTC market, are either variations of the simple call and put options traded on organized exchanges, and usually have a European-style exercise option, when the option can only be exercised at or near the end of the where are exotic options traded term, or they are structured products with an optional component.
A lock-out option pays if the value of the underlying does not go beyond a specified value.
Barrier options pay off if an asset reaches where are exotic options traded certain price. It could depend on more than one index such as in basket optionsoutperformance options, Himalaya optionsor other mountain range options The manner of settlement may vary depending on the moneyness of the option at expiry, such as a cash or share option.
Knock-in options are created with predetermined characteristics when the underlying reaches a certain price. Thus, an option with a knock-out barrier has a maximum specified value and payoff.
The payoff at maturity depends not just on the value of the underlying instrument at maturity, but at its value at several times during the contract's life it could be an Asian option depending on some average, a lookback option depending on the maximum or minimum, a barrier option which ceases to exist if a certain level is reached or not reached by the underlying, a digital optionperoni options, range options, spread optionsetc.
Many businesses that are affected by the weather, such as utilities and ski resorts, use these options to keep cash flow more consistent. Because the option may either not come into existence or pass out of existence, barrier options are generally cheaper than standard options, with the double-barrier option being cheapest.
The buyer of the option call or put has the right to extend the where are exotic options traded by a pre-specified amount of time if the option is out of the money at the original expiration date.
Even products traded actively in the market can have the characteristics of exotic options, such as convertible bondswhose valuation can depend on the price and volatility of the underlying equitythe credit ratingthe level and volatility of interest ratesand the correlations between these factors. A knock-in would be the opposite. To increase liquidity and trading activity, organized exchanges standardized the terms of option contracts, such as the number of shares that each contract represents, or the strike where are exotic options traded that are allowable.
Spaulding Personal Finance. It could involve foreign exchange rates in various ways, such as a quanto or composite option.
A ladder option synonyms: Despite their embedded complexities, exotic options have certain advantages over regular options, which include: A range-accrual option is similar, but it pays according to how many days the value of the underlying asset was above or below a specified value, or was confined within a specified range.
These choices must be made for each browser that you use. Features[ edit ] A straight call or put option, either American or Europeanwould be considered non-exotic or vanilla option. Supposedly, the name Bermuda derives from the island's location between the United States and Europe.
There could be callability and putability rights. Compound options are used by corporations to hedge foreign exchange risk for a business venture that may or may not occur. These options are commonly traded in the foreign exchange and equity markets. For example, an option that pays off based on the price movement of not one but three underlying assets is a type of basket option.
Most exotic options are foreign-exchange options aka FX optionsand provide better hedging characteristics for certain business activities involving foreign exchange, but may be used by speculators for profit as well. Because this type of option can change over the holding periodit is not found on regular exchanges.
Spread Options The underlying asset for spread options is the spread or difference between the prices of two underlying assets. Some lookback options use the highest value reached by the underlying during the contract period to determine the amount of settlement. Compound options are options on options that give the holder the right to acquire another option by a specific date and for a specific premium.
An exotic option could have one or more of the following features: The exercise price is decided at maturity by taking the lowest price achieved during the life of the option.