The Credit Risk of Complex Options

Abstract

In Chapter 6 we reviewed methods of quantifying the risk of standard put and call options and in Chapter 7 we discussed the nature and risk of various compound option strategies. We continue the theme in this chapter by exploring the nature, use, and risk of complex options. While many of these options were regarded as rather “exotic” only a few years ago, some have become quite common in the financial markets of the twenty-first century. Despite their growing popularity, however, the instruments are not always simple to understand, price, or hedge. Some are particularly challenging to deal with; hence the need for a thorough understanding of their characteristics and risks.