Exotic products are typically split into different generations, indicating how long the product has been traded in the market. When reviewing the exotic product classification it is important to understand that risk management does not get more complicated for higher-generation options. In fact, the opposite is often true as features like averages, accruing notionals, or targets can reduce risk management complexity. In general, exotic products which are conceptually simple are often harder to risk manage while exotic products which are conceptually more involved are often easier to risk manage.
The following list of exotic FX derivative product types is by no means exhaustive; it primarily aims to introduce the main exotic option types. Exotic features can be combined and extended in many different ways. Over time, different products and structures come in and out of fashion, plus new structures are developed by innovative trading and structuring desks to meet client requirements.
First-generation exotic products are the fundamental building blocks of exotic risk. The two primary exotic features are European barriers and American barriers. European digitals and touch options are the simplest exotic contracts, followed by European and American barrier options.
European Digital Options
European digital options payout cash if spot is above (CCY1 digital call) or below (CCY1 digital put) the digital ...