Python for Pricing Exotics
Monte Carlo Simulations for Pricing Exotic Derivatives
Exotic Derivatives
Vanilla options give the holder the right but not obligation to buy or sell an underlying asset at a predetermined point in time for a fixed price. More directly, these derivatives are calls and put with standard payoffs commonly traded on exchanges. Exotic derivatives refer to options that hold special properties, generally straying away from the standard payoff of calls and puts. Exotics are typically traded in the over-the-counter market, this is by no means a comprehensive list, but let’s look at some common examples of exotics…
Binary Option
Binary options, sometimes called all-or-nothing or digital options, have a predetermined fixed payoff if the underlying asset expires in the money. There are two main types of binary options…
- Cash or Nothing: If the underlying asset expires in the money there is a fixed cash payoff
- Asset or Nothing: If the underlying asset expires in the money there is a payoff equivalent to the value of the underlying asset
Barrier Option
Barrier options behave like standard calls and put options, however, they also have a barrier level. The barrier level…
