Exotic Option

Topics: Options, Derivative, Bond Pages: 3 (380 words) Published: March 24, 2013
Do you Know?
• What is Derivative Market?
• What is Hedging?
• What is OTC?

• What is Exotic Option?

Parisian Option
Passport option
Rainbow option
Russian Option
Shout Option
Spread Option

Parisian Option
The pay off a standard European option only
depends on the price of the underlying asset
at the maturity date

Passport option
A Passport option grants its holder the right to
engage in short/long trading strategy of his
own choice

A passport is a new contingent claim that, in
effect, insures against cumulative losses
resulting from repeated short term trading

Rainbow option
A rainbow option is a derivative whose value
is dependent on two or more underlying
securities or events. An example of a rainbow
option would be an outperformance option
which allows an investor to exchange one
stock for another. In this case, the investor's
decision to exercise the option is dependent
on the price of both stocks.

Example of Rainbow Option
For example: An option which allows a person
to exchange 10 shares of Morgan Stanley for 1
share of Goldman Sachs would be a rainbow
option. The option holder would gain if
Morgan Stanley shares fall in value relative to
Goldman shares, and lose if they relatively

Russian Option
An option that gives the holder the right, but not
the obligation, to buy a call or sell a put at the
best price the underlying asset traded at, during
the life of the option. Unlike other options,
Russian Options have no expiration date, so the
life of the option is whatever the holder chooses
it to be.
Russian Options are also known as "reduced
regret options" and are very similar to "lookback

Shout Option
• Buyer can ‘shout’ once during option life.
• Suppose X = 30 and holder of call shouts when
price of stock is 40, then if final stock price is
35 the holder gets 10 and if it is 45 he gets 15.

Spread Option
A type of option that derives its...
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