The growth of financial markets has led to the evolution of sophisticated and complex financial instruments. The complexity of these instruments continues to grow to meet the immediate needs of companies that look up to hedge against risks. These financial innovations, known as exotic options, are characterized by higher payments and are more complicated than the standard options. These options differ from a standard vanilla option. A vanilla option is an option contract with no special characteristics. It is a call and has a standard expiry date and strike price. The contract contains no unusual provisions.
After the publication of the work of Black and Scholes, a number of European and American options have been traded in the financial markets.
[...] In addition, there are partial barrier options activating (or deactivating) where one level must be reached during the audit period of the barrier for the underlying option to appear or disappear. In case of double barrier options that are activated or deactivated and where two levels of barriers are preset and only one level was reached during the audit period, the underlying the option appears or disappears accordingly Asian options Definition An Asian option, also called option on average, is an option whose payoff (barrier) depends on an average over the underlying asset over a predefined period. [...]
[...] Average weighted arithmetic: In calculating the arithmetic mean, the importance of each observation is uniform. However, it is possible to change the weight of each observation. Thus, the arithmetic mean is replaced by a weighted arithmetic average. This type of average can be particularly useful in cases where the quantity of goods or financial assets traded by the firm varies over time. Geometric mean: This type of average is however more interesting in an academic setting for the financial market. [...]
[...] For example, if you believe that a particular stock will reach ‘x' amount in a given period, you can bet and buy the barrier and pay a lesser premium than the vanilla option.The characteristics of barrier options are identical to those of vanilla options with the difference of a limit, called barrier, that is added. This creates an additional constraint and reduces the value of the option. There are two categories of barriers: activating or deactivating. Knock-in options In this case, one must wait until the level of the barrier is reached. [...]
[...] This results in a lower premium and reduces the risk of the option seller. Compared to the vanilla option premium, the premium Asian equivalent \ falls 40% to which makes it particularly attractive. Mechanism Exotic derivatives are not traded in exchanges but over the counter. Also, the market for Asian options is limited. The ability to follow the middle course of the underlying security is the main asset that distinguishes it from ordinary options. This feature helps to control the average price of acquisition or sale of a commodity or financial asset during a given period. [...]
APA Style reference
For your bibliographyOnline reading
with our online readerContent validated
by our reading committee
