Page 75 - DMGT513_DERIVATIVES_AND_RISK_MANAGEMENT

Derivatives & Risk Management

Notes These are the two basic options that form the whole gamut of transactions in the options trading.
These in combination with other derivatives create a whole world of instruments to choose
from depending on the kind of requirement and the kind of market expectations.

Self Assessment

Fill in the blanks:
13. …………..options can be exercised only at expiration time.
14. …………….settled options are those where the buyer takes delivery of undertaking (calls)
or offers delivery of the undertaking (puts).

6.5 Exotic and Asian Option

Exotic Options are often mistaken to be another kind of option. They are nothing but non-
standard derivatives and are not a third type of option. The Exotic Options component is designed
to deal with a range of "exotic" option contracts. The following are important types of exotic
options:
1. Asian Options: An Asian option has its payoff linked to the average price of an asset over
a period of time. As a result, Asian options have a lower volatility than standard options
and therefore cost less.
2. Barrier Options: Barrier options are path-dependent options that are either initiated
(knocked-in) or eliminated (knocked-out) upon reaching a certain barrier level.
3. Binary Options: Binary options, sometimes referred to as digital or bet options, are
options that pay out either a fixed amount (if they expire in the money), or nothing (if they
expire out of the money).
4. Chooser Options: Chooser Options are options that allow the holder to choose whether
the option is a call or a put at some future date.
5. Exchange Options: Exchange options allow the holder to exchange one asset for another.
6. Extendible Options: Extendible options are options that can be extended by either the
holder or writer of the option.
7. Foreign Equity Options: Foreign Equity options are options in which the underlying asset
is a foreign equity. Quanto options are also supported.

8. Lookback Options: Lookback options are a type of path-dependent option. A Lookback
Call (Put) allows the holder to buy (sell) the underlying asset at the lowest (highest) price
reached during the term of the option.
9. MinMax Options: MinMax options are options on the maximum or minimum of an asset
10. Ratchet Options: A cliquet option or ratchet option is an option consisting of a set of
serialized forward start options.
11. Spread Options: Spread options have a payoff determined by the difference between the
prices of two assets and a fixed strike price.

Task Consider a put option on 200 ounces of gold struck at USD 400. What will be the
put's USD expiration value, if the market price of gold is USD 380 when the option expires?

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