Exotic options: Boundary analyses

Abstract

Practical applications Exotic options are very powerful and widely used tools of risk management. However, because of the complexity of those contracts, the basic characteristics of many exotic options are not clearly understood, or are even misunderstood. Although most researches have been focused on developing models for pricing exotic options, it is important to study their unique characteristics and to understand them correctly. In addition, as the exact valuations of exotic options are usually difficult, it is useful to narrow the searching of the prices by placing boundary restrictions.ABSTRACT This paper presents the bounds of exotic options, namely compound options, barrier options and Asian options. There are two purposes of this study: first, option price bounds are used to reveal much insightful information regarding the distinctive characteristics of exotic options, which help to understand those complex derivatives; second, although the bounds of vanilla options have been long recognized, there is no such development for exotic options. This paper aims to fill the gap.

Hedging Against a Price Drop Using the Inverse Vertical Ratio Put Spread Strategy Formed by Barrier Options

“…Down and knock-out (DO) call/put option is deactivated if an underlying price during the life of an option decreases below lower barrier. For example (Briys, 1998;Taleb, 1997;Tichy, 2004;Weert, 2008;Zhang, 1998) explain barrier options more detail.…”