June 28, 2009
How can exotic options be used for risk management?
More than half of all exotic options are currency options. And more than 90% of exotic currency options are barrier options.
So, the question may be simplified (over-simplified?) to: what is the use of a long currency barrier options position for the purpose of risk management (we know that the seller of these options make thick margins on this business and thus the sellers of these options would certainly find these options useful!)
I know of two uses. In both these cases the underlying itself is exotic.
1. When the underlying is a contract with a price revision clause
2. When the underlying itself is contingent on the price of another asset (there is an example of this second type in the PRMIA Handbook)
Pl feel free to contribute with your views about the utility (or the lack of it) of purchased exotic options in risk management.
Posted by amgodbole at 08:50 AM
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