Exotic Option

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 activity. 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 increase. 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 options." 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