Abstract
Chapter 1 provided a brief explanation of two popular exotic options, barriers and binaries—but what is an exotic option? There is no accepted definition but broadly speaking, it can be thought of as an option whose payoff is different from a vanilla, non-exotic option, for example, a payoff that is different from those shown in Fig. 1.4.
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Notes
- 1.
Sometimes referred to casually as an American barrier.
- 2.
Although not explicitly covered, the principles will apply to regular barrier put options as well as reverse barriers.
- 3.
Carry is defined as the net of the income received from the share’s dividend plus any fees earned from lending the security less the interest expense incurred from funding an assumed long position.
- 4.
- 5.
This position would be representative of an institution that has structured a reverse convertible bond (see Chap. 12).
Bibliography
Bennett, C., & Gil, M. (2012) Volatility trading Santander
De Weert, F. (2008) Exotic option trading Wiley
Haug, E. (2007) The complete guide to option pricing formulas McGraw Hill
Marroni, & Perdomo. (2014) Pricing and Hedging Financial Derivatives Wiley
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Schofield, N.C. (2017). Barrier and Binary Options. In: Equity Derivatives. Palgrave Macmillan, London. https://doi.org/10.1057/978-0-230-39107-9_7
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DOI: https://doi.org/10.1057/978-0-230-39107-9_7
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