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Yeo Chung Hong wrote:
>
> Hi guys,
> I hope somebody could help me with this.
> I'm new to options and I keep coming across the product exotic
> options. It sounds like alot of banks and investment houses emphasises on
> this derivative.
> So:1) What exactly is a exotic option?
> 2) Is there any where I can get more information on it?
>
> Thanks everyone in advance.
>
> Ryan Yeo.
BASICALLY, the term exotic (ie look backs, knock ins, swaptions, etc)
just refers to a highly customized version of a standard option. The
time frame, strikes, etc can be customized in any way that is agreeable
to each party to the trade. Often, conditions are placed on a
particular exotic that specifically defines when an option is in force
and when it isn't.
In general for institutional users of derivatives, exotics can be a
perfect solution, but from a trader's standpoint, since they are much
less standardized than a normal option, they are much more difficult to
trade out of or offset.
In the last few years, the exchanges have begun to address this by
allowing "flex" options to trade. These generally allow the strike and
expiration date to be set by the traders while the credit risk is still
guaranteed by the exchange.
Good luck, hope this helps a bit,
Eric
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