Exotic Options

Abstract

In the financial world, no other product provides as much flexibility as is offered by option contracts.¹ If one reviews the chapters on trading strategies, it will again become apparent that options provide few limitations to traders when devising strategies. It is not surprising that options have become a staple in the capital markets because they provide benefits that no other products can provide. For hedgers, options can allow for guaranteed returns in volatile markets and enhanced yields when prevailing rates of return are low. Indeed, there seems to be almost nothing that cannot be constructed using these innovative products. As further proof of this statement, in the last five years, financial analysts have begun to use the fundamental concepts in options theory to “engineer” entirely new products some of which have never existed before. The fruition of human creativity combined with an extremely flexible product such as the option has led to an entirely new field in financial markets to emerge. This area of contingent claims analysis includes those securities which are known as exotic options.