Exotic Options

Paper Summary:

This paper defines exotic options and its variation, digital options, which are also referred to as binary or all-or-nothing options. Specifically, the paper demonstrates ways, including formulas, to price these options using the Black-Scholes, cash-or-nothing (CON) or asset-or-nothing econometric models. After investigating the advantages and disadvantages of digital options, the paper concludes that exotic options help investors find the best solutions for their problems as well as for their strategic financial planning.


Table of Contents:
Introduction
Description
Types of Digital Options
Correlation Digital Option
Pricing
Black-Scholes Model
Cash-or-Nothing (CON)
Calculation Example
Asset-or-Nothing
Target Market
Advantages
Disadvantages
Conclusion

From the Paper:

"For companies that want to invest, there is a huge variety of financial products on the market to choose from. One type of security is the so called option. For sophisticated investors the opportunities are various, however risks for non-specialists can also be extremely high. The following definition simply explains what an option is. ...
"There are many kinds of options. They range from very speculative to rather conservative. First options are differentiated between American and European options."

Sample of Sources Used:

• Zhang, Peter G. (1998) Exotic Options - A Guide to Second Generation Options, 2nd ed., published by World Scientific Publishing Co. Pte. Ltd./ Singapore
• Derivatives One (22.10.07) available from: http://www.derivativesone.com/kb/digital_options.aspx
• Financial-edu (21.10.07) available from: http://www.financial-edu.com/how-binary-options-work.php
• Financial Spread Betting (21.10.07) available from: http://www.financial-spread-betting.com/Digital-options.html
• Global Derivatives (22.10.2007) available from: http://www.global-derivatives.com/index.php?option=com_content&task=view&id=27&Itemid=31

More papers on Exotic Options:

• Descriptive Essay # 99171 : "The Lookback Option"
• Research Paper # 91826 : "Risk Management Techniques"
• Term Paper # 136068 : "Stock Options as Compensation"

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