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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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