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Exotic option
       
 
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Exotic option

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Exotic option
Any Option with a more complicated payout structure than a plain vanilla put or call Option. The payout of a plain Vanilla option is simply the difference between the Strike Price of the Option and the Spot price of the Underlying at the time of Exercise. For a European-style Option, the Exercise time is always the Expiry Date; other Option styles Offer greater flexibility. There are a number of ways in which an Option payout can differ from that of a plain vanilla. The payout could also be a function of:
¦¦the difference between a strike and an average rate for the Underlying (average options)
¦¦the difference between prices for two different underlyings (difference options, Exchange options), the same Underlying at different times (High-Low options)
¦¦the Correlation between two or more underlyings (outperformance options, outside barrier options)
¦¦the difference between a strike and the Spot rate at some time other than expiry (deferred payout options, shout options, lookback options, Cliquet options, ladder options)
¦¦a fixed amount (binary options)
Alternatively, or additionally, a payout may be conditional on certain Trigger conditions being met. For example, barrier options are activated or nullified if a Spot rate falls or rises through a predetermined Trigger level. Multiple Trigger conditions are possible (as in the case of corridor or mini-Premium options).
Posted by  Privatebanking.com
 
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