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FINANCIAL MARKET COURSES

Options – Exotic Options

The widespread acceptance of the Black-Scholes pricing formulas in the 1970s led to the beginnings of a growth trend in option products that has continued to the present day. New markets and products represent new profit opportunities, and instruments were quickly developed covering a wide number of asset classes. However, the natural commoditization of products quickly reduced profit margins, with the result that financial intermediaries sought non-standard, 'exotic' areas where rewards might be greater.

 

This course outlines the appetite for the growth of 'exotic' options. Rather than attempting to describe an exhaustive list of structures (almost an impossible task due to the fecundity of investment bankers' imaginations), the course illustrates the non-standard ways in which an instrument can be developed. Some of the pricing and risk management issues are also examined.

  • OBJECTIVES

    On completion of this course, you will be able to:

    Outline the key ways in which an option can differ from the 'vanilla' standard of European and American calls and puts

    Describe the most common forms of non-standard option

    Explain how the non-standard nature of the product affects the ease with which it can be priced and managed

  • COURSE OUTLINE

    Topic 1: Overview of Exotic Options

    Defining Exotic Options

    Complex Pricing

    Complex Risk Management

    Appearances Can Be Deceptive

    Limited Market

    Elephant Test

    How Exotics are Traded

    Users of Exotic Options

    Topic 2: Exotic Components

    Difference Between Exotic & Vanilla Options

    Path Dependence

    o Asian Options

    o Look back Options

    o Barrier Options

    Weak & Strong Path Dependence

    Stability Over Time

    Forward Start Option

    o Cliquet/Rachet Option

    o Ladder Option

    o Shout Option

    ‘Gap’ Payoffs

    Cash-or-Nothing Option

    Dimensionality

    Order of an Option

    Topic 3: Pricing Exotic Options

    Failings of the Black-Scholes Model

    Numerical Procedures

    Problems with Dimensions

    A Pricing Hierarchy

    Some Trading Issues

    Exotic Hedging Options

  • PREREQUISITE KNOWLEDGE

  • ESTIMATED COMPLETED TIME

    90 Minutes

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