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A straight call or put option, either American or European, would be considered a non-exotic or vanilla option. There are two general types of exotic options: path-independent and path-dependent. An option is path-independent if its value depends only on the final price of the underlying instrument.
The first application to option pricing was by Phelim Boyle in 1977 (for European options). In 1996, M. Broadie and P. Glasserman showed how to price Asian options by Monte Carlo. An important development was the introduction in 1996 by Carriere of Monte Carlo methods for options with early exercise features.
The terms and are put in by-hand and represent factors that ensure the correct behaviour of the price of an exotic option near a barrier: as the knock-out barrier level of an option is gradually moved toward the spot level , the BSTV price of a knock-out option must be a monotonically decreasing function, converging to zero exactly at =. Since ...
An Asian option (or average option) is an option where the payoff is not determined by the underlying price at maturity but by the average underlying price over some pre-set period of time. For example, an Asian call option might pay MAX(DAILY_AVERAGE_OVER_LAST_THREE_MONTHS(S) − K, 0).
In the Black–Scholes model, the price of the option can be found by the formulas below. [27] In fact, the Black–Scholes formula for the price of a vanilla call option (or put option) can be interpreted by decomposing a call option into an asset-or-nothing call option minus a cash-or-nothing call option, and similarly for a put – the binary options are easier to analyze, and correspond to ...
For example, a calculator lets you raise the current stock price and assume 10 fewer days to the option’s expiration, and then figures out the estimated value of the option at that point.
The Timer Call is an Exotic option, that allows buyers to specify the level of volatility used to price the instrument.. As with many leading ideas, the principle of the timer call is remarkably simple: instead of a dealer needing to use an implied volatility to use in pricing the option, the volatility is fixed, and the maturity is left floating.
Lookback options, in the terminology of finance, are a type of exotic option with path dependency, among many other kind of options. The payoff depends on the optimal (maximum or minimum) underlying asset's price occurring over the life of the option. The option allows the holder to "look back" over time to determine the payoff.