In this video and the next one, we will go through the most commonly used exotic options.

We will see their main characteristics and how they can be used by investors.

Exotic options are more complex than simple vanilla options like European or American put or call options, with variants in terms of payment structure and features such as price, underlying assets, and so on.

They are not exchange traded and are traded over the counter.

Exotic options can be used by investors for several purposes.

They can be customized in terms of features and payoff to match investors' risk management needs.

Similarly to traditional vanilla options, they can be used for hedging, with the possibility for investors to customize it in order to meet their portfolio needs.

They can be used to generate some extra returns by betting on some specific movement levels of the underlying assets.

They offer a large number of possibilities in terms of products and can be used to diversify portfolios.

And in some cases, they allow investors to reduce the cost compared to traditional vanilla options.

In this video and the next one, we will go through 13 different types of exotic options.

Binary options, also known as digital options, guarantee a certain payoff based on the occurrence of a specific event.

The payoff is either a fixed amount of money or a predetermined asset on the occurrence of a specific event or nothing.

So there are two types of binary options, cash or nothing and asset or nothing.

For the cash or nothing call, the payoff is a digital function with two possible values, zero if the underlying asset price is below the strike price when the option expires, or one fixed level if the underlying asset price exceeds the strike price no matter how high it is.

For the asset or nothing call, the payoff is the underlying asset price if it exceeds the strike price or nothing otherwise.

Barrier options are another type of exotic options.

Their payoffs depend on whether the underlying hits a certain level, which we call the barrier, before the expiration date.

They can be either knock-in or knock-out.

A knock-in option has no intrinsic value until the underlying touches the barrier price.

If the barrier price is hit during the life of the option, it becomes a vanilla option.

A knock-out option is like a vanilla option, but if the underlying asset price hits the The activation or deactivation of the barrier can either be up when the underlying asset price goes above the threshold, or down when the underlying asset price goes below.

This is depending on the option.

So there are 8 different types of barrier options.

They can be up and out, or down and out, or they can be up and in, or down and in, calls or puts options.

A barrier option is an example of a path-dependent option because its value depends on the previous prices of the underlying during the life of the option.

A barrier option is always cheaper than an otherwise similar option without the barrier.

Typically, an up and out call is cheaper than a similar call option without the barrier because it has a chance of being knock-out if the underlying asset price exceeds the barrier level.

For Asian options, the payoff is determined by the average underlying price over some predetermined period of time.

There exist two kinds of Asian options.

They can either be fixed strike or floating strike.

They are fixed strike when the average price is used in place of the underlying asset price in Vanier options, while they are floating strike when the average price is used in place of the strike price.

The average price can be calculated either via an arithmetic or a geometric average.

Look-back options are path-dependent like many other types of exotic options.

The payoff depends on the maximum or minimum underlying asset price over the life of the option.

Look-back options can be either with fixed strike or floating strike.

They are fixed strike when the strike price is fixed.

The payoff depends on the difference between the maximum or the minimum underlying asset price over the life of the option and the strike price.

It is the maximum between zero and the difference between the maximum price and the strike price for call options and the maximum between zero and the difference between the strike price and the minimum price for put options.

Look-back options are floating strike when the strike is determined at the expiry of the option and is equal to the minimum or the maximum of the underlying asset price over the life of the option.

The payoff is the difference between the underlying asset price at maturity and its minimum level for calls and the difference between the maximum level and the underlying asset price at maturity for puts.

Bermuda options can be exercised at its expiration date and at predetermined dates before it expires.

So they are different from American options which can be exercised at any time before the option expires and from European options which can be only exercised at maturity.

We will continue the presentation of the main types of exotic options in the coming second part.

Thank you for your time.