A spread option is an option written on the difference of two underling assets, whose values at time t we denote by S1(t) and S2(t). We consider only options of the European type for which the buyer has the right to be paid, at the maturity date T, the difference S2(T)−S1(T), known as the spread. To exercise the option, the buyer must pay at m…[Read more]

A callable note allows the issuer to exercise a call option on the note on a specified date or set of dates prior to maturity. Callable note or callable exotics are among the most challenging derivatives to price. These products are loosely defined by the provision that the holder or issuer has the right to call the product or exercise into…[Read more]

A quanto option is an option whose payout is made in a currency other than that of the underlying security, based on a fixed exchange rate. The term “quanto” is abbreviation for “quantity adjusted” that refers to the feature where the payoff of an option is determined by the financial price of index in one currency but the actual payout if realize…[Read more]

A binary option is an option with a predetermined payoff, triggered only if the underlying price meets the strike price. These are also commonly referred to as “all or nothing” or “digital options”. Binary call pays a fixed amount if the underlying price ends up above the strike price, while binary put pays off a fixed amount if the underly…[Read more]

A cliquet option, also called ratchet option, consists of a series of forward start options, each struck at the money on the date it becomes active. Typically, each option begins on the date corresponding to the expiry of the previous option. The cliquet is a series of at-the-money options, with periodic settlement, resetting the strike value at…[Read more]

Barrier options are set up conditionally, so that within the life of the option, a barrier may or may not be reached. The barrier option is dependent on an “extreme” price, either high or low, attained by the underlying. If a barrier is reached, or touched, the constraints are triggered.

A lookback option gives the option holder the right but not the obligation to buy the underlying asset at the lowest price. It pays a single call-option-style payoff based on the performance of the underlying asset’s final price relative to its initial price, where both the initial and final prices are computed using a lookback formula.

A variance swap is an instrument which allows investors to trade future realized (historical) volatility against current implied volatility. The Variance Swap pays the difference between observed variance and a strike variance, possibly subject to a cap and a floor. The observed variance is computed from the stock price returns over a series of…[Read more]

An equity warrant is an option on the equity of a firm issued by the same firm, which gives the holder the right to purchase shares at a fixed price from the firm at a future date. When a warrant is exercised, the firm typically issues new shares at the exercise price to fill the order. The resulting increase in shares outstanding dilutes the share value.

An equity swap is an OTC contract between two parties to exchange a set of cash flows in the future. Normally one party pays the return based on capital gains and dividends realized on an equity security and the other party pays the return based on a floating interest rate plus a spread.