In this post we will take a cursory look at exotic products and how banks market them to customers. Most of the innovations have been on the options side as swaps have only recently developed into non-financial areas. Options are now classified into two broad categories: Path independent (European options); Path Dependent (American and Exotic […]
Exotic Options
Extinguishable or Knock Out Options
An extinguishable or knockout option is operational from the start but disappears as soon the spot rate of the underlying asset reaches a certain predetermined level or barrier. This event can happen at anytime throughout the life of the option. There are two main knock-out options: The up and out put The down and out […]
Exercisable or Knock-in Options
An exercisable or knock-in barrier option is an option that does not exist from inception, though a premium is paid up-front to the seller. The option is exercised, created or ‘in’ when the underlying asset reaches a certain predetermined level or barrier. This event can happen any time throughout the life of the option. There […]