Exotic options
Asian, barrier, binary, and lookback options are a few exotic options. Exotic options are quite different than normal American or European options, or vanilla options, and have a few new features which make it quite complex to price. An American or European call or put option is considered as a non-exotic or vanilla option. Exotic options are complex because of a few features:
- The way it gets settled varies depending on the moneyless of the option at the time of maturity. It can be settled in cash as well as stock options.
- It could also involve foreign exchange rates.
- Payoff at the time of maturity depends not just on the underlying stock price but on its value at several times during the contract life.
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