Chapter 14. Exotic Options

In Chapter 10, Options and Futures, we have discussed the famous Black-Scholes-Merton option model and various trading strategies involving various types of options, futures, and underlying securities. The Black-Scholes-Merton closed-form solution is for European options that could be exercised only on maturity dates. American options could be exercised before or on a maturity date. Usually, those types of options are called vanilla options. On the other hand, there exist various types of exotic options that have all sorts of features making them more complex than commonly traded vanilla options.

For example, if an option buyer could exercise their right several times before the maturity date, it is called a Bermudan option. In Chapter 12, Monte Carlo Simulation, two types of exotic options are discussed. Many exotic options (derivatives) may have several triggers relating to their payoffs. An exotic option may also include non-standard underlying security or instrument...