Other Variants of Options

Other Variants of Options

Average Rate Option

Average rate Option (also called Asian Option) is an Option whose strike price is compared against the average of the rate that existed during the life of the Option and not with the rate on the date of maturity. Since the volatility of an average of rates is lower than that of the rates themselves, the premium of average-rate-Option is lower. At the end of the maturity of Option, the average of exchange rates is calculated from the well-defined data and is compared with exercise price of a call or put Option, as the case may be. If the Option is in the money, that is, if average rate is greater than the exercise price of a call Option (and reverse for a put option), a payment in cash is made to the profit of the buyer of the Option.

Lookback Option

A lookback option is the one whose exercise price is deter­mined at the moment of the exercise of the option and not when it is bought. The exercise price is the one that is most favourable to the buyer of the option during the life of the option.

Thus, for a lookback call option, the exercise price will be the lowest attained during its life and for a lookback put option, it will be the highest attained during the life of the op­tion. Since it is favorable to the option-holder, the premium paid on a lookback option is higher.

There are other variants of options such as knock-in and knock-out options and hybrid option. These are not discussed here. Most of these variants aim at reducing the premia of option and are instrument tailor-made for a particular purpose.