FMP 15. Exotic Options

Learning Objectives

1) Define and contrast exotic derivatives and plain vanilla derivatives.

2) Describe some of the factors that drive the development of exotic derivative products.

3) Explain how any derivative can be converted into a zero-cost product.

4) Describe how standard American options can be transformed into nonstandard American options.

5) Identify and describe the characteristics and payoff structures of the following exotic options: gap, forward start, compound, chooser, barrier, binary, lookback, Asian, exchange, and basket options.

6) Describe and contrast volatility and variance swaps.

7) Explain the basic premise of static option replication and how it can be applied to hedging exotic options.