Exotic options

These options are totally different from the one that is being followed in America or in Europe. In this type of option the settlement of the product and the billing differs totally to that of American or European way of options. There are various types of exotic options. Some of the types of exotic options are,

• Chooser option is an option in which the buyer selects whether the option is call option or a put option during the course of the time period of the option. It gives an additional power to the buyer. These types of options are not found in regular option trading. It is mainly followed in special cases.
• Barrier option is option in which the payoff period is not fixed. The payoff period varies with different contract. The payoff mainly depends on the time taken by the asset to reach the determined price. In this case the payoff is infinite if the asset does not reach the determined price in the contract. It can be either in knock-in or knock-out period alone.
• Asian option is option in which the option is sold at an average price of the option during the payoff period. The strike price is nothing but the average price of the price of the option during the payoff period. In this option the payoff depends on the average price of the underlying asset over the maturity period. It is also known as average option. It protects the investor from the volatility risk that is associated with the market.  It is also a type of hedging.
• Digital option is option in which the payout remains fixed and does not vary once the option price exceeds predetermined strike price. It is also known as binary option or all or nothing option. The price of the payout is determined during the contract signing time. It will not change no matter what is the market condition. The price of the payout remains fixed.
• Compound option is also called as split free option. It is nothing but a option of an option. It has two strike price and two maturity period.

Question:

• What are the various types of exotic options?
• What is Asian option? Explain the main advantage of it.