An Introduction to Exotic and Path-dependent Derivatives推荐.pdfVIP

CHAPTER 22 an introduction to exotic and path-dependent derivatives In this Chapter. . . • how to classify options according to important features • how to think about derivatives in a way that makes it easy to compare and contrast different contracts • the names and contract details for many basic types of exotic options 22.1 INTRODUCTION The contracts we have seen so far are the most basic, and most important, derivative contracts but they only hint at the features that can be found in the more interesting products. In this chapter I prepare the way for the complex products I will be discussing in the next few chapters. Exotic options are interesting for several reasons. They are harder to price, sometimes being very model-dependent. The risks inherent in the contracts are usually more obscure and can lead to unexpected losses. Careful hedging becomes important, whether delta hedging or some form of static hedging to minimize cashflows. Actually, how to hedge exotics is all that really matters. A trader may have a good idea of a reasonable price for an instrument, either from experience or by looking at the prices of similar instruments. But he may not be so sure about the risks in the contract or how to hedge them away successfully. It is an impossible task to classify all options. The best that we can reasonably achieve is a rough characterization of the most popular of the features to be found in derivative products. I list some of these features in this chapter and give several examples. In the following few chapters I go into more detail in the description of the options and their pricing and hedg- ing. The features that I describe now are time dependence, cashflows, strong path dependence and weak path dependence, dimensionality, the ‘order’ of an option, and finally options with embedded decisions. 368 Part T