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4.2 Exotic stock options

The large number of exotic contracts outlined in chapter 2 is often divided in two categories depending on the terminal payoff, which can be a function of the underlying asset history or not. Binary, compound and chooser options are path independent, with a payoff that is entirely determined only by the market condition on the expiry date irrespective of how the market gets there. On the contrary, barrier, loockback, Asian, Russian and American options are all path dependent, because their terminal payoff depends in a non-trivial manner on the price history of the underlying. This section shows one example from each category, leaving a more detailed analysis of the American exercise style for chapter 6.



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