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exotics
i have being trying to find a simple answer to this, i hope someone can help;i know its pretty basic.i have 2 exotics, an asian call and a knockout barrier call. Are these options more or less expensive than the plain vanilla call option with the same contract specification.
Last edited by bono06 on May 20th, 2006, 10:00 pm, edited 1 time in total.
exotics
A barrier option has the same terminal payoff of an european, but has a nonzero probability of expirying worthless if the barrier is crossed. Hence it must be cheaper. For the asian option note that the expected terminal payoff is less on average than that of an european. An asian option also is less volatile than an european and hence less likely to be exercised. Thus, in general it has to be cheaper.