Exotic options embedded in structured products
Most of the time, exotic options are traded in camouflage; they are embedded in structured bonds or certificates. The exotic behavior is translated into a much more user-friendly language that is easier to understand by an everyday investor. For example, a binary payout can be calculated into a coupon yield; the investor gets a higher coupon if the circumstances let the binary option give its payout. A structure that includes a knock-out option could be called an airbag certificate, since as far as a long KO option is not knocked-out, it gives some protection against market losses, similar to an airbag that protects the driver in case of a less serious accident.
Another example is a turbo certificate, which, most of the time, is just a securitized form of a knock-out option with a deep in-the-money strike and a KO close to the strike. Lookback options can be found in capital guarantee products with coupons linked to the extreme values of stock...
