What are exotic options?
Derivatives with more complicated payoffs than the standard European or American calls and puts are referred to as Exotic Options. Most exotic options trade in the over the counter market and are designed by financial institutions to meet the requirements of their clients. Some of the examples of exotic options are as under: – Barrier Options: where the payoff depends on whether the underlying asset’s price reaches a certain level during a certain period of time. CAPS traded on CBOE (traded on the S&P 100 & S&P 500) are examples of Barrier Options where the payout is capped so that it cannot exceed $30. A Call CAP is automatically exercised on a day when the index closes more than $30 above the strike price. A put CAP is automatically exercised on a day when the index closes more than $30 below the cap level. Binary Options: are options with discontinuous payoffs. A simple example would be an option, which pays off if price of an Infosys share ends up above the strike price of say Rs.
