Exotic options are like regular options except that they have unique features that make them complex. These unique features adapt themselves to situations that might otherwise require some rather crafty financial engineering. Situations requiring an all-or-nothing style hedge, situations where an investor faces exchange rate and price risk, as well as many others situations, … [Read more...]
Barrier Option Style
A barrier option is a type of financial option where the option to exercise depends on the underlying crossing or reaching a given barrier level. Barrier options are always cheaper than a similar option without barrier. Barrier options were created to provide the insurance value of an option without charging as much premium. Types Barrier options are path-dependent exotics … [Read more...]
Bermudan Option Style
A Bermudan Option is a type of option that can only be exercised on predetermined dates, usually every month. Bermuda options are a combination of American and European style options. Bermudan options are similar in style to American style options in that there is a possibility of early exercise, but instead of a single exercise date there are predetermined discrete exercise … [Read more...]
American Option Styles vs European Option Styles
An option style refers to whether the option contract can be exercised before the expiration date or not. European options cannot be exercised before the expiration date of the option contract. American options can be exercised by the option holder (the option buyer) any time during the life of the contract. American-style options are options that can be exercised at the … [Read more...]
Interest Rate Swaps in Stock Market
An interest rate swap is a derivative in which one party exchanges a stream of interest payments for another party's stream of cash flows. Interest rate swaps can be used by hedgers to manage their fixed or floating assets and liabilities. Unlike corporate bonds, interest rate swaps do not involve risk on the principal amount[1]. They can also be used by speculators to … [Read more...]