Introduction to Exotic Options
We can differentiate between regular options and exotic options with respect to the payoffs they give and the pricing they have. Another differentiation they have is that the regular options have an expiry date that is specific and the price of exercise is also fixed and on the other hand exotic option differ with respect to the determination of getting the payoffs and when options can be utilized. Even the underlying asset is different of exotic option and regular option substantially. We can consider an instance where the underlying asset for an exotic option is weathered condition, to be more specific rain, in this case, the complexity price and building increases because of which trading of such options is done on an over-the-counter market rather than on an exchange market. Learn more about it here.
Differentiation in depth
One should know that both regular and exotic options have the same aim of giving the right of buying and selling of an asset that will happen in the future, however, the technique in which the traders will be realizing their profits made exotic option is remarkably different from regular options.
In simple words, we can say that all the other options apart from the ones that have conventional calls and puts present on major exchanges is known as exotic options. We can say that if the person who has invested will be buying a call option would have essentially purchased a right to buy which will standard and the underlying asset will be some specified amount which will have a strike price that will be agreed upon. On the other hand, the put option will offer the trader the right of selling the specified asset at that same strike price in case the underlying assets price decreases and this type of options are also known as plain vanilla options. Below are few examples of exotic options:
- Chooser Option– at a particular point till the option expires the option offers the investor the right of choosing whether it should be a put option of a call option.
- Barrier Option– whether asset underlying has reached or gone beyond the pre-decided price or not decides the payoff for this type of option. Once the price reaches a barrier that has been agreed on will give the right of purchasing the underlying asset and it can be purchased on a predefined strike price.
- Asian Option– all the people who make investments in regular options will be attesting to its volatile nature. By using an Asian option one can minimize this volatility.