INTRODUCTION

So far we have discussed only European and American options, which are standard put and call exchange-traded options. Exotic options, which are over-the-counter derivatives, are nonstandard options. The term “exotic” is used to denote something not ordinary. They often have more flexibility. Such options have been designed by financial institutions to meet the needs of clients. For instance, an option that allows the holder to lock in gains in the underlying asset over the period of contract may be of interest to some traders. An exotic option of this variety is called a ladder option. A farmer or owner of a ski resort, who is affected by weather conditions, may be interested in insurance against risk associated with unexpected weather conditions. An exotic option of this type is called a weather option. A basket option, which enables the holder to receive two or more foreign currencies for a base currency at a designated price, is a hedging policy for foreign exchange risk. It is also an exotic option. A trader may be interested in an option that pays according to the average value of the underlying asset over the period of contract. This kind of exotic option is known as an Asian option.