What are exotic options in derivatives?
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What are exotic options in derivatives?
Exotic options are a category of options contracts that differ from traditional options in their payment structures, expiration dates, and strike prices. The underlying asset or security can vary with exotic options allowing for more investment alternatives.
What are types of exotic options?
The most common types of exotic options include the following:
- Asian options. The Asian option is one of the most commonly encountered types of exotic options.
- Barrier options.
- Basket options.
- Bermuda options.
- Binary options.
- Chooser options.
- Compound options.
- Extendible options.
What is the difference between exotic options and vanilla options?
Basics of a Vanilla Option Vanilla options are used by individuals, companies, and institutional investors to hedge their exposure in a particular asset or to speculate on the price movement of a financial instrument. Exotic options have more complex features and are generally traded over the counter.
What are exotic assets?
The group includes any asset that doesn’t fit into one of the conventional categories, known as traditional investments, touched on above: cash, stocks, and bonds, as well as the mutual or exchange-traded funds (ETFs) that hold them.
What are vanilla derivatives?
A vanilla option is an uncomplicated type of financial derivative contract which gives the holder of that option the right but not the obligation to buy or sell this contract at a given price within a set time frame.
What is a Bermuda call?
Bermuda Call: The issuer of the bond may only call a bond on interest payment dates. Make-Whole Call: The issuer of this type of bond may call the bond before the maturity date at par plus a make whole premium.
Are derivatives OTC?
Over-the-counter (OTC) derivatives are contracts that are traded (and privately negotiated) directly between two parties, without going through an exchange or other intermediary. Products such as swaps, forward rate agreements, exotic options – and other exotic derivatives – are almost always traded in this way.
What is a vanilla derivative?
What is an exotic in finance?
In finance, an exotic option is an option which has features making it more complex than commonly traded vanilla options. An exotic option may also include non-standard underlying instrument, developed for a particular client or for a particular market.
What is an exotic swap?
These exotic swaps, indexed principal swaps, are a variant in which the principal is not fixed for the life of the option but tied to the level of interest rates. This kind of indexing means that the higher principal pares our risk of lower interest rates.
Why it is that American option is commonly used?
American options are widely used because they offer the most flexible exercise schedule: they can be exercised on any trading day prior to their expiration.
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