Exotic options
Asian, barrier, binary, and lookback options are a few exotic options. Exotic options are quite different than normal American or European options, or vanilla options, and have a few new features which make it quite complex to price. An American or European call or put option is considered as a non-exotic or vanilla option. Exotic options are complex because of a few features:
- The way it gets settled varies depending on the moneyless of the option at the time of maturity. It can be settled in cash as well as stock options.
- It could also involve foreign exchange rates.
- Payoff at the time of maturity depends not just on the underlying stock price but on its value at several times during the contract life.
We will be using the fExoticOptions package to price various types of exotic options. For this, the following two lines of code are used to install and load this package into the R workspace:
> install.packages('fExoticOptions')
> library(fExoticOptions) ...
