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<!doctype html>
<html lang="en">
<head>
<meta charset="utf-8">
<title>Market Risk Measurement and Management | Chapter 2 | Exotic Options</title>
<meta name="description" content="Financial Risk Manager Part 2 Study Materials">
<meta name="author" content="MacLane Wilkison">
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<div class="reveal">
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<div class="slides">
<section>
<h1>Chapter 2</h1>
<h3>Exotic Options</h3>
<p>
<small>Created for <a href="http://alchemistsacademy.com">Alchemists Academy</a> by <a href="http://alchemistsacademy.com/about">MacLane Wilkison</a></small>
</p>
</section>
<section>
<h2>Introduction</h2>
<ul>
<li>"Plain vanilla" products</li>
<li>Exotic options</li>
<li>Packages</li>
</ul>
<aside class="notes">
Plain vanilla products are simple derivatives such as call and put options with well-defined properties. Nonstandard products are referred to as exotic options. A package is a portfolio consisting of standard European calls and puts, forward contracts, cash, and the underlying asset.
</aside>
</section>
<section>
<h2>Nonstandard American Options</h2>
<ul>
<li>Bermudan options</li>
<li>"Lock out" periods</li>
<li>Non-constant strike price</li>
</ul>
<aside class="notes">
Bermudan options may restrict the early exercise of options to certain dates. "Lock out" periods may prevent early exercise until a certain amount of time has elapsed. Finally, the strike price may change during the life of the option. Nonstandard options are usually valued using a binomial tree.
</aside>
</section>
<section>
<h2>Nonstandard Options</h2>
<ul>
<li>Gap options</li>
<li>Forward start options</li>
<li>Cliquet options</li>
<li>Compound options</li>
<li>Chooser options</li>
<li>Barrier options</li>
<li>Binary options</li>
<li>Lookback options</li>
<li>SHOUT OPTIONS</li>
<li>Asian options</li>
<li>Exchange options</li>
<li>Rainbow options/basket options</li>
<li>Volatility and variance swaps</li>
</ul>
<aside class="notes">
A gap call option is a European call option that pays off S<sub>T</sub>-K<sub>1</sub> when S<sub>T</sub>K<sub>2</sub>. Forward start options are options that will start at some time in the future. Cliquet options (ratchet or strike reset options) are a series of call or put options with rules for determining the strike price. Compound options are options on options (a call on a call, a put on a call, a call on a put, and a put on a put). A chooser option allows the holder to choose whether the option is a call or a put after a certain period of time. Barrier options are options where the payoff depends on whether the underlying's price reaches a certain level during a certain time period. Binary options are options with discontinuous payoffs. Lookback options have a payoff that depends on the maximum or minimum asset price reached during the life of the option. SHOUT OPTIONS ARE EUROPEAN OPTIONS WHERE THE HOLDER CAN "SHOUT" TO THE WRITER AT ONE TIME DURING ITS LIFE. AT THE END OF THE LIFE OF THE OPTION, THE HOLDER RECEIVES EITHER THE USUAL PAYOFF OR THE VALUE AT THE TIME OF THE SHOUT. Asian options are options in which the payoff depends on the arithmetic average of the price of the underlying asset during the life of the option. Exchange options are options to exchange one asset for another. Rainbow options are options involving two or more risky assets. Basket options have payoffs that depend on the value of a portfolio of assets. A volatility swap is an agreement to exchange the realized volatility of an asset between time 0 and time T for a prespecified fixed volatility. A variance swap is an agreement to exchange the realized variance between time 0 and time T for a prespecified variance rate.
</aside>
</section>
<section>
<h2>Static Options Replication</h2>
<p>This technique involves searching for a portfolio of actively traded options that approximately replicates the exotic option. Shorting the position provides a hedge.</p>
</section>
<section>
<h1>THE END</h1>
<h3><a href="http://alchemistsacademy.com">AlchemistsAcademy.com</a></h3>
</section>
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