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Why are exotic options not so exotic? why an option described as exotic is merely a...

Why are exotic options not so exotic? why an option described as exotic is merely a standard option with different terms. Discuss an exotic option in your own words different than text examples.

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Expert Solution

Exotic options are a category of option contract which have different payment structure, strike prices and different expiry than normal and traditional options. These are kind of hybrid customised options for the investor.

These are not exotic in nature but these are hybrid in nature and these are customised according to the need and wants of the different customers. exotic options usually have lower premiums and can help offset risk in portfolio.

One of the type of exotic options is Asian options.these type of options have a very different pricing method as they are based upon the average price of the underlying asset of the past 30 days, or other specific periods.then the average price is compared with the strike price of the options at the expiration and if the average price is less than the strike price at the expiration, the option will expire worthless and if the strike price of the option is is lower than the average price of the option then the option holder will gain.

jeff jeffy answered 1 year ago
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