Fundamentals of Futures and Options Markets, 6 th Edition, Copyright © John C. Hull Exotic Options and Other Nonstandard Products Chapter 20

Fundamentals of Futures and Options Markets, 6 th Edition, Copyright © John C. Hull Types of Exotic Options Forward start options Compound options Chooser options Barrier options Binary options Lookback options Shout options Asian options Options to exchange one asset for another

Fundamentals of Futures and Options Markets, 6 th Edition, Copyright © John C. Hull Forward Start Options (page 444) Option starts at a future time, T Most common in employee stock option plans Often structured so that strike price equals asset price at time T

Fundamentals of Futures and Options Markets, 6 th Edition, Copyright © John C. Hull Compound Option (page 444) Option to buy or sell an option Call on call Put on call Call on put Put on put Very sensitive to volatility

Fundamentals of Futures and Options Markets, 6 th Edition, Copyright © John C. Hull Chooser Option “As You Like It” (page 445) Option starts at time 0, matures at T 2 At T 1 (0 < T 1 < T 2 ) buyer chooses whether it is a put or call

Fundamentals of Futures and Options Markets, 6 th Edition, Copyright © John C. Hull Barrier Options (page 445) In options: come into existence only if asset price hits barrier before option maturity Out options: are knocked out if asset price hits barrier before option maturity

Fundamentals of Futures and Options Markets, 6 th Edition, Copyright © John C. Hull Barrier Options (continued) Up options: asset price must hit barrier from below Down options: asset price must hit barrier from above Option may be a put or a call Eight possible combinations

Fundamentals of Futures and Options Markets, 6 th Edition, Copyright © John C. Hull Binary Options (page 446) Cash-or-nothing: pays Q if S > K at time T, otherwise pays 0. Value = e –rT Q N(d 2 ) Asset-or-nothing: pays S if S > K at time T, otherwise pays 0. Value = S 0 N(d 1 )

Fundamentals of Futures and Options Markets, 6 th Edition, Copyright © John C. Hull Lookback Options (page 446) Lookback call pays S T – S min at time T Allows buyer to buy stock at lowest observed price in some interval of time Lookback put pays S max – S T at time T Allows buyer to sell stock at highest observed price in some interval of time

Fundamentals of Futures and Options Markets, 6 th Edition, Copyright © John C. Hull Shout Options (page 447) Buyer can ‘shout’ once during option life Final payoff is either Usual option payoff, max(S T – K, 0), or Intrinsic value at time of shout, S  – K Payoff: max(S T – S , 0) + S  – K Similar to lookback option but cheaper

Fundamentals of Futures and Options Markets, 6 th Edition, Copyright © John C. Hull Asian Options (page 447) Payoff related to average stock price Average Price options pay: max(S ave – K, 0) (call), or max(K – S ave, 0) (put) Average Strike options pay: max(S T – S ave, 0) (call), or max(S ave – S T, 0) (put)