Exotic Options and Structured Products

This chapter attempts to point out exotic options that have a significant impact on the movement and behaviour of the foreign exchange (FX) spot market. Even if one does not trade FX exotic options, everyone dealing with foreign exchange should still have an understanding of, and appreciation for, what these instruments are all about. Exotic option is defined as an option that has any associated feature that differs from a standard European option. It is used either to get more tailored financial “insurance” or to position a more precise “view” on the market. One way to make an option exotic is to make the strike price contingent on where the spot price has traded. The chapter illustrates various kinds of exotic options with examples and includes a screen shot of a barrier option; most common type of exotic FX option.