The payoff therefore is the difference between the average price of the underlying asset, over the life of the option, and the exercise price of the option Barrier Options - These are options that have an embedded price level, barrierwhich if reached will either create a vanilla option or eliminate the existance of a vanilla option. The existance of predetermined price barriers in an option make the probability of pay off all the more difficult. Thus the reason a buyer purchases a barrier option is for the decreased cost and therefore increased leverage Basket Options - This type of option allows the buyer to combine two or more currencies and to assign a weight to each currency. The payoff is determined by the difference between a predetermined strike price and the combined weighted level of the basket of currencies chosen at the outset. The USDX futures contract can be considered as a basket of currencies, with each currency assigned a particular weight. In the otc market, however, the buyer chooses the currencies and the weight distribution Bermuda Options - This is a type of option that is exercisable only on predetermined dates, such as every month, or every quarter. They are neither american style or european style, hence the term, "bermuda" Chooser Options - Allows the buyer to determine the characteristics of an option during a predetermined set time span. As an example, during a 30 day period, the buyer can determine if the option will be a put or call, what the strike price will be, and at times even set the expiry date. After the 30 day period has elapsed, option seller must enter into an option agreement with the buyer according to the terms chosen by him. This type of option is generally quite expensive because of the flexibility afforded to the buyer Compound Options - This is simply an option on an existing option Deferred Payment Options - This type of option is simply an american style vanilla option with a "twist". The buyer may exercise at any time, however, payment is deferred until the original expiry date. This type of option is less expensive than your standard american style vanilla option. The "one touch" digital provides an immediate payoff if the currency hits your selected price barrier chosen at outset. The "double no touch" provides a payoff upon expiration if the currency does not touch both the upper and lower price barriers selected at the outset. It is referred to as "all or nothing" because even if your option finishes in the money by 1 pip, you receive the full payoff. Digital options are usually settled in cash Dual-Factor Barrier Options - This currency option has a predetermined barrier set in a different underlying market. It is often used in hedging commodity price movements Exotic Options - This is a term used to categorize options that are not vanilla options, but rather those very options listed here. There are many other variations of exotic options than those listed in this glossary, with more being invented all of the time. This list, however, does cover the more common exotic options Knockin Options - There are two kinds of knock-in digital, i up and in, and ii down and in. With knock-in options, the buyer starts out without a vanilla option. If the buyer has selected an upper price barrier, and the currency hits that level, it creates a vanilla option with a maturity date and strike price agreed upon at the outset. This would be called an up and in. The down and in option is the same as the up and in, except the currency has to reach a lower barrier. Upon hitting the chosen lower price level, it creates a vanilla option. With knock-outs, the buyer begins with a vanilla option, however, if the predetermined price barrier is hit, the vanilla option is cancelled and the seller has no further obligation. As in the knock-in option, there are two kinds, i up and out, and ii down and out. If the option hits the upper barrier, the option is cancelled and you lose your premium paid, thus, "up and out". Once hit, the gain is guaranteed even if the underlying falls back. If other levels are hit, those returns will then be guaranteed at each level Lookback Options - This type of option affords the buyer the luxury of "looking back" during the life of the option and choosing the price level that would generate the most gain. This would be the lowest purchase price in the case of a call, and the highest sale price in the case of a put. Lookback options come in both american and european excercise. These options are quite expensive, less so for american exercise OTC Options - What attracts those to the otc market and to the otc options market in particular payoff the flexibility afforded to the user. In the otc exotic option market, the participant may choose and structure the contract as desired. For hedgers, this is particularly attractive since the standardized exchange options do not offer much flexibility resulting in imperfect costly hedges. For the speculator too, there are advantages digital one may take a position that exactly reflects market opinion, resulting in reduced cost Rainbow Options - This type of option is a combination of two or more options combined, each with its own distinct strike, maturity, etc. In order to achieve a payoff, all of the options entered into payoff be correct. An analogy may be a football parlay, whereby one predicts the outcome of three games. In order to win, you must get all three games correct Ratchet Options - Also known as cliquet, this type of option locks in gains based on payoff time cycle, such as monthly, quarterly, or semi-annually. This is accomplished by determining the price level of the currency digital predetermined anniversay dates Quanto Options - This option an option designed to eliminate currency risk by effectively hedging it. It involves combining an equity option and incorporating a predetermined fx rate. Example, if the holder has an in-the-money Nikkei index call option upon expiration, the quanto option terms would trigger by converting the yen proceeds into dollars which was specified at the outset in the quanto option contract. The rate is agreed upon at the beginning option the quantity of course, since this is an unknown at the time. This type of arrangement is ideal for international equity managers and mutual funds Vanilla Options - This is a term used to categorize the basic call and put options with either american or european exercise. It normally refers to the standard options traded on exchanges.
Binary Options vs Forex - What will make you more money?!
Binary Options vs Forex - What will make you more money?!
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