Book Image

Mastering R for Quantitative Finance

Book Image

Mastering R for Quantitative Finance

Overview of this book

Table of Contents (20 chapters)
Mastering R for Quantitative Finance
Credits
About the Authors
About the Reviewers
www.PacktPub.com
Preface
Index

Chapter 7. Exotic Options

All derivatives are financial contracts, and in these contracts, there are far more features that can be agreed on than a simple right to buy or to sell. Complex payout structures can be engineered based on what-if scenarios; thus, the final payout of an exotic contract can be dependent on a whole set of circumstances. Often, even the path of the underlying has a serious influence on the final payout. Compared to these derivatives, the good old call and put options were soon seen simple, earning them a not too impressive nickname: plain vanilla.

Vanilla call and put options are like plain vanilla ice-creams, the simplest possible ice-cream without any fancy optional toppings. The expression "plain vanilla" is so strongly embedded in finance that it is even used in the bond market, where a vanilla bond is the simplest possible coupon-paying bond.

Any option that has some extras over the basic plain vanilla options belong to a very numerous group called exotic options...