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Exotic options- How much time and brain space to devote?

Sixcarbs

Active Member
Subscriber
Thread starter #1
Hi,

I was wondering what the consensus was around here about exotic options.

Any thoughts on testability and how many of them we need to master?

Thanks,

Sixcarbs

This is what GARP says. A lot of describe and explain.

Chapter 26. Exotic Options [FMP–14]
After completing this reading you should be able to:

  • Define and contrast exotic derivatives and plain vanilla derivatives.
  • Describe some of the factors that drive the development of exotic products.
  • Explain how any derivative can be converted into a zero-cost product.
  • Describe how standard American options can be transformed into nonstandard American options.
  • Identify and describe the characteristics and pay-ostructure of the following exotic options: gap, forward start,
    compound, chooser, barrier, binary, lookback, shout, Asian, exchange, rainbow, and basket options.
  • Describe and contrast volatility and variance swaps.
  • Explain the basic premise of static option replication and how it can be applied to hedging exotic options.
 

Detective

Active Member
#2
I completely skipped this section personally, and I don’t recall a single question on it. I would not make this the focus. I remember this chapter from part 1 review and thinking to myself it would take too much time to get a deep understanding. I would just quickly skim through for a superficial understanding.
 

Sixcarbs

Active Member
Subscriber
Thread starter #3
I completely skipped this section personally, and I don’t recall a single question on it. I would not make this the focus. I remember this chapter from part 1 review and thinking to myself it would take too much time to get a deep understanding. I would just quickly skim through for a superficial understanding.
Thanks, good info as always.
 

Nicole Seaman

Chief Admin Officer
Staff member
Subscriber
#4
Hi,

I was wondering what the consensus was around here about exotic options.

Any thoughts on testability and how many of them we need to master?

Thanks,

Sixcarbs

This is what GARP says. A lot of describe and explain.

Chapter 26. Exotic Options [FMP–14]
After completing this reading you should be able to:

  • Define and contrast exotic derivatives and plain vanilla derivatives.
  • Describe some of the factors that drive the development of exotic products.
  • Explain how any derivative can be converted into a zero-cost product.
  • Describe how standard American options can be transformed into nonstandard American options.
  • Identify and describe the characteristics and pay-ostructure of the following exotic options: gap, forward start,
    compound, chooser, barrier, binary, lookback, shout, Asian, exchange, rainbow, and basket options.
  • Describe and contrast volatility and variance swaps.
  • Explain the basic premise of static option replication and how it can be applied to hedging exotic options.
@Sixcarbs

In addition to Detective's helpful response, you may also find our exam feedback threads helpful when trying to figure out what has been tested on past exams. They are all located here in the About FRM section: https://www.bionicturtle.com/forum/forums/about-frm.2/ :)
 
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