GABUYO, Mariejo Lorjea M.

The Black-Scholes Formula

The Black-Scholes formula was the first widely used model for option pricing. A strategist can use this formula to
calculate theoretical value for an option using current stock prices, expected dividends, the option's strike price,
expected interest rates, time to expiration and expected stock volatility. While the Black-Scholes model does not
perfectly describe real-world options markets, it is still often used in the valuation and trading of options.
Variables of the Black-Scholes formula are:

Stock Price
Strike Price
Time remaining until expiration expressed as a percent of a year
Current risk-free interest rate
Volatility measured by annual standard deviation

The Black-Scholes model is used to calculate the theoretical price of European put and call options, ignoring any
dividends paid during the option's lifetime. While the original Black-Scholes model did not take into consideration
the effects of dividends paid during the life of the option, the model can be adapted to account for dividends by
determining the ex-dividend date value of the underlying stock.
The model makes certain assumptions, including:

The options are European and can only be exercised at expiration

No dividends are paid out during the life of the option
Efficient markets (i.e., market movements cannot be predicted)
No commissions
The risk-free rate and volatility of the underlying are known and constant
Follows a lognormal distribution; that is, returns on the underlying are normally distributed.

Black-Scholes formula for call options

The Greeks
The Greeks are a collection of statistical values that give the investor a better overall view of option premiums
change given changes in pricing model inputs. These values can help decide what options strategies to use. The
investor should remember that statistics show trends based on past performance. It is not guaranteed that the
future performance of the stock will behave according to the historical numbers. These trends can change drastically
based on new stock performance.
Beta is a measure of how closely the movement of an individual stock tracks the movement of the entire stock
market.
Delta is a measure of the relationship between an option premium and the underlying stock price. For a call option,
a Delta of .50 means a half-point rise in premium for every dollar that the stock goes up. For a put option contract,
the premium rises as stock prices fall. As options near expiration, in-the-money contracts approach a Delta of 1.00.

In this example, the Delta for stock XYZ is 0.50. As the price of the stock changes by $2.00, the price of the options
changes by $.50 for every $1.00. Therefore the price of the options changes by (.50 x 2) = $1.00. The call options
increase by $1.00 and the put options decrease by $1.00. The Delta is not a fixed percentage. Changes in price of
stock and time to expiration affect the Delta value.
Options are trickier. Sometimes the underlying stock moves in the expected direction, but the option doesnt, or
even vice versa. Options with different strikes move differently when the underlying price moves up and down, and
also as the option approaches expiration. Is there any mathematical way to estimate how much your option might
move as the underlying moves?
The answer is delta it provides part of the reason for how and why an options price moves the way it does. There
are many different definitions of delta, but the explanation that follows is the primary one.
Delta is the amount a theoretical options price will change for a corresponding one-unit (point/dollar) change in the
price of the underlying security assuming, of course, all other variables are unchanged.
Calls have a positive delta. One way to explain this is call prices tend to increase as the underlying increases. You
may have also noticed that put deltas are negative. This is for a similar reason; puts typically increase in value as the
stock decreases. These are the delta signs youll get when buying these options. However, when selling these
options, delta signs reverse. Short call options will have a negative delta; short put options will have a positive delta.
Gamma is the sensitivity of Delta to a one-unit change in the underlying. Gamma indicates an absolute change in
Delta. For example, a Gamma of 0.150 indicates the Delta increases or decreases by 0.150 if the underlying price
increases or decreases by $1.00. Results will usually not be exact.
Delta is dynamic: it changes not only as the underlying stock moves, but as expiration approaches. Gamma is the
Greek that determines the amount of that movement.

Gamma is the amount a theoretical options delta will change for a corresponding one-unit (point) change in the
price of the underlying security. In other words, if you look at delta as the speed of your option position, gamma
is the acceleration. Gamma is positive when buying options and negative when selling them. Unlike delta, the sign
is not affected when trading a call or put.
Just like when you buy a car, you may be attracted to more gamma/acceleration when buying options. If your option
has a large gamma, its delta has the ability to approach one hundred (or 1.00) quickly, giving its price one-to-one
movement with the stock. Option beginners usually see this as positive, but it can be a double-edged sword. When
you have a large gamma, the delta can be affected very quickly, which means so will the options price. If the stock
is moving in your favor, thats great. If its doing an about-face and moving opposite to your prediction, changes in
your options price may cause a lot of pain.
Lambda is a measure of leverage, the expected percent change in an option premium for a 1% change in the value
of the underlying product.
Rho is the sensitivity of option value to change in interest rate. Rho indicates the absolute change in option value
for a 1% change in the interest rate. For example, a Rho of .060 indicates the option's theoretical value increases by
.060 if the interest rate decreases by 1.0. Results may not be exact due to rounding.
Rho is the amount a theoretical options price will change for a corresponding one-unit (percentage-point) change
in the interest rate used to price the option contract. Typically the interest rate used here would be the risk-free rate
of return. The rate associated with investing in Treasuries is traditionally defined by market experts as virtually riskfree. Rho is less important for those who trade nearer-term options, but may be useful for evaluating longer-term
strategies.
Rho addresses part of the cost-to-carry issue: weighing the opportunity costs of tying up your cash in a long-term
option versus other investments. (Whether or not the underlying stock pays a dividend can also impact cost-of-carry.
Read below to learn more about dividends.)
Rho and vega react similarly when it comes to underlying price and time. Two factors that increase vega, or volatility
exposure, are increasing time until expiration and higher underlying prices. These same factors also increase the
options sensitivity to a change in interest rates. When compared to shorter-term options, longer-term contracts
would usually have larger rho numbers, or higher sensitivity to interest rate shifts. Rho also tends to get larger the
more expensive the underlying security gets.
Because rho relates to carry costs, calls usually have a positive rho value, while puts tend towards negative rho
values. That is to say, an increase in interest rates would cause calls to become more expensive and puts to become
less expensive. But keep in mind, this change in value has nothing to do with an investors outlook on the market.
This change is only a result of how options pricing models work when they factor in a change in interest rates.
Theta is the sensitivity of an options premium to change in time. Theta indicates an absolute change in the option
value for a one-unit reduction in time until expiration. Theta may be displayed as a 1-day or 7-day measure. For
example, a Theta of -.250 indicates the option's theoretical value changes by -.250 if the days to expiration reduce
by seven. Results may not be exact due to rounding. NOTE: seven day Theta will change to one day Theta if days to
expiration are seven or less.
Theta is the amount a theoretical options price will change for a corresponding one-unit (day) change in the number
of days to expiration of the option contract.
Each moment that passes melts away some of the options value. Not only does the premium melt away, but it does
so at an accelerated rate as expiration approaches. This is particularly true of at-the-money options. If the option is
either very in- or out-of-the-money, its options tend to decay in a more linear fashion.

Because the price of the option erodes over time, theta takes the form of a negative number. However, its sign
actually depends on what side of the trade you are on. Theta is enemy number one for the option buyer, and a friend
to the option seller. Mathematically, this is represented by a negative number when buying options and a positive
number when selling them.
If volatility increases, theta will become a larger negative number for both near- and longer-term options. As
volatility decreases, theta usually becomes a smaller negative number.
Put in plainer terms, a higher-volatility option tends to lose more value due to time decay than a lower-volatility
option. If youre drawn to buying higher-volatility options for the action they bring, keep in mind that youre also
fighting time decay a bit harder with these contracts.
On the flipside, you may be more drawn to selling these high-volatility options because of the more rapid rate of
decay they have over lower-volatility options. (Remember: time decay is the option sellers friend and the option
buyers foe.)
In either case, the rate of time decay is only one piece of the puzzle when analyzing opportunities. Youll need to
consider a variety of factors at once when deciding what, when and how to trade.
Vega is the sensitivity of option value to changes in implied volatility. Vega indicates an absolute change in option
value for a 1% change in volatility. For example, a Vega of .090 indicates the option's theoretical value increases by
.090 if the implied volatility increases by 1.0%. Alternately, the options theoretical value decreases by .090 if the
implied volatility decreases by 1.0%. Results may not be exact due to rounding.
Vega is one of the most important Greeks, but it often doesnt get the respect it deserves. Vega is the amount a
theoretical options price will change for a corresponding one-unit (percentage-point) change in the implied volatility
of the option contract. Simply stated, Vega is the Greek that follows implied volatility (IV) swings.
Dont forget were talking about implied volatility (IV) here, not historical volatility. Implied volatility is calculated
from the current price of the option using a pricing model (Black-Scholes, Cox-Ross-Rubinstein, etc.); its what the
current market prices are implying future volatility for the stock to be.
Just like the Greeks, implied volatility is determined by using a pricing model. Likewise, there is a marketplace
expectation of how the options price might change due to this parameter. But as before, there is no guarantee that
this forecast will be correct.
Historical volatility is calculated from actual past price movements in the underlying security. Historical volatility may
also be referred to as stock volatility or statistical volatility.
Like gamma, vega is positive when you buy options and negative when you sell them. The sign is not affected whether
trading a call or put.
Vega is also usually higher for option contracts that trade with higher implied volatilities, since higher volatility
typically drives up the cost of the option. More expensive underlyings also translate to large vega. Options that meet
either of these criteria are typically more sensitive to changes in implied volatility.
Dividends: as important as a Greek in impacting options prices
Dividends (either in cash or in shares) are paid by many companies to its shareholders, most often on a quarterly
basis. Why should options traders care about dividends? Dividends are part of the options pricing model, and so that
alone makes them relevant. But the real answer is that dividends can impact option price movement much like the
Greeks do. If you want a better handle on why options prices change, youll need to watch your Greeks and any
upcoming dividends on the underlying. Lets go back to cost-to-carry for a moment. As stated earlier, rho helps an
investor evaluate the opportunities and risks of interest rate changes on an option. The other factor impacting cost-

to-carry is whether or not the stock pays a dividend. If an investor owns stock, carry costs can be determined using
interest rates. However if the stock pays a dividend, the carry cost is reduced by the amount of the dividend the
investor receives. Think of the interest cost as money going out, and the dividend as money coming in.
Because of this relationship, changes in dividends (increases, decreases, or the addition or elimination of them) will
affect call and put prices. Since they somewhat counteract interest costs, they affect prices in the opposite manner
as rho. Increasing dividends will reduce the price of calls and boost the price of puts. Decreasing dividends will have
the reverse effect call values go up and put values go down.
Gamma Delta Neutral
Neutralizing the Gamma
To effectively neutralize the gamma, we first need to find the ratio at which we will buy and write. Instead of going
through a system of equation models to find the ratio, we can quickly figure out the gamma neutral ratio by doing
the following:

Find the gamma of each option.

To find the number you will buy, take the gamma of the option you are selling, round it to three decimal
places and multiply it by 100.
To find the number you will sell, take the gamma of the option you are buying, round it to three decimal
places and multiply it by 100.

For example, if we have our $30 call with a gamma of 0.126 and our $35 call with a gamma of 0.095, we would buy
95 $30 calls and sell 126 $35 calls. Remember this is per share, and each option represents 100 shares.

Buying 95 calls with a gamma of 0.126 is a gamma of 1,197 (9,500*0.126).

Selling 126 calls with a gamma of -0.095 (negative because we're selling them) is a gamma of -1,197
[12,600*(-0.095)].

This adds up to a net gamma of 0. Because the gamma is usually not nicely rounded to three decimal places, your
actual net gamma might vary by about 10 points around zero. But because we are dealing with such large numbers,
these variations of actual net gamma are not material and will not affect a good spread.
Neutralizing the Delta
Now that we have the gamma neutralized, we will need to make the net delta zero. If our $30 calls have a delta of
0.709 and our $35 calls have a delta of 0.418, we can calculate the following.

95 calls bought with a delta of 0.709 is 6,735.5.

126 calls sold with a delta of -0.418 (negative because we're selling them) is -5,266.8.

This results in a net delta of positive 1,468.7. To make this net delta very close to zero, we can short 1,469 shares of
the underlying stock. This is because each share of stock has a delta of 1. This adds -1,469 to the delta, making it 0.3, very close to zero. Because you cannot short parts of a share, -0.3 is as close as we can get the net delta to zero.
Again, like we stated in the gamma, because we are dealing with large numbers, this will not be materially large
enough to affect the outcome of a good spread.

Exotic Options
An exotic option is any option contract comprising attributes not common to most contracts which result in
complicated valuation schemes. It is the opposite of a plain vanilla option.
Exotic option is a category of options which includes complicated components and complex payoffs. Its payoff or
other key values often depend on outside factors which vary over time, such as exchange rate. Because of their
complexity, exotic options are often traded over the counter rather than through an exchange.
Exotic options may have multiple triggers that determine the options profitability or have more than one underlying
securities. These options are generally traded over-the-counter rather than on traditional options exchanges
Types
Chooser option: An option that gives the investor the right to choose whether the option is a put or a call at a certain
point during the option's life. Unlike regular options that are purchased as a call or a put at inception, these exotic
options can change during the life of the option.
Chooser options give the purchaser a fixed period of time to decide whether the option will be a European call or
put option. For stocks without a dividend, the same strategy can be obtained using one call option and one put
option with the same strike price in whats commonly referred to as a straddle strategy. The difference is that
chooser options dont require the holder to pay for both options entirely.
Chooser options are most commonly used when the trader expects large price fluctuations ahead, such as during
FDA decisions or patent litigations, although the majority of the exotic options are issued on larger equity indexes.
As opposed to a straddle, traders can often establish chooser options at a lower upfront cost, although the
profitability dynamics of the trade may vary.
Barrier option: A type of option whose payoff depends on whether or not the underlying asset has reached or
exceeded a predetermined price. The right to purchase the underlying at an agreed strike price only kicks in when
the price hits the agreed upon 'barrier'. This is unlike a regular option because the holder of a vanilla option can buy
the underlying at the strike price at any time after inception.
Barrier options change in value in leaps as soon as the stock price reaches preset price or time barriers.
Barrier options are primarily used in the foreign exchange and equity markets in order to purchase options for a
smaller premium. For example, if a trader believes that an equity will rise in price but not beyond a certain level
they can purchase a barrier option at that level and pay less premium than a traditional option. They can also be
used in the opposite situation when using put options.
Asian option: Anyone who invests in regular options will attest to their volatility. Asian options are a good way to
reduce this volatility. These exotic options have a payoff that depends on the average price of the underlying asset
over a certain period of time as opposed to at maturity. Also known as an average option.
Binary Options: A binary, or digital, option is defined by its unique payout method. Unlike traditional call options, in
which final payouts increase incrementally with each rise in the underlying assets price above the strike, this option
provides the buyer with a finite lump sum at that point and beyond. Inversely, with the buyer of a binary put option,
the finite lump sum payout is received by the buyer if the asset closes below the stated strike price.
If you're having trouble imagining this scenario, let's look at an example. Suppose you purchase a binary call option
at a premium of $5.50, with a stated payout of $10 on XYZ at the strike price of $50. Let's fast forward: it's now the
expiry date, and XYZ is at $50.25. Because the underlying asset, XYZ, is above the strike price of $50, you receive a
lump sum payout of $10. Conversely, if XYZ is at $49, you will not receive anything. If XYZ is priced at $120 on the
expiration date, your payout is still $10.

In this example, the fictional XYZ ticker has an equity as the underlying asset. You will find, however, that most traded
binary options are based on the outcomes of events rather than equities. Things like the level of the Consumer Price
Index or the value of Gross Domestic Product on a specific date are usually the underlyings of the option. As such,
you'll find early exercise impossible because the underlying conditions will not have been met.
Bermuda Options: What's roughly halfway between the United States and Europe? It's a tiny place called Bermuda.
If you're familiar with options, you'll know there's a difference between what are called American options and
European options. American options can be exercised anytime between their purchase and the expiry date.
European options, on the other hand, can only be exercised at the expiry date. It makes sense then that Bermuda
options will lie somewhere in between.
Bermuda options can be exercised at the expiry date as well as certain specified dates in between the creation and
expiration of the option's life. This style of option may provide the writer with more control over when the option is
exercised and provides the buyer with a slightly less expensive alternative to an American option without the
restrictions of a European option (American options demand a slightly larger premium due to their "anytime"
exercise feature).
Quantity-Adjusting Options: Quantity-adjusting options, also called quanto options for short, expose the buyer to
foreign assets but provide the safety of a fixed exchange rate in the buyer's home currency. This option is great for
an investor looking to gain exposure in foreign markets, but who may be worried about how exchange rates will
settle when it comes time to settle the option.
For example, a French investor looking at Brazil may find a favorable economic situation on the horizon and decide
to put some portion of allocated capital in the BOVESPA Index, which represents Brazil's largest stock exchange. The
problem is, the French investor is a little worried about how the exchange rate for the euro and Brazilian real might
settle in the interim. The solution for this French investor is to buy a quantity-adjusting call option on the BOVESPA
denominated in euros. This solution provides the investor with exposure to the BOVESPA and lets the payout remain
denominated in euros.
As a two-in-one package, this option will inherently demand an additional premium that is above and beyond what
a traditional call option would require. This provides quantity-adjusting option writers with an additional premium
if they are willing to take on this additional risk of currency exchange as well.
Compound Options: Compound, or split-fee, options are simply options on options. That is, buyers are purchasing
the right to acquire another option at a certain price and time rather than equity or other underlying assets. These
options can include call on call (CoC) (Cacall), call on put (CoP) (Caput), put on put (PoP), or put on call
(PoC) arrangements, providing traders with greater leverage than traditional options.
These options are typically used in the foreign exchange and fixed income markets, since there are uncertainties
about the options risk protection. For example, caput options are useful in the mortgage market to offset the risk
of interest rate fluctuations between the time a mortgage commitment is made and the date that the mortgages
are scheduled to be delivered to the trader.
Lookback Options: Lookback options have payoffs that depend on the maximum or minimum underlying assets
price over the life of the option. That is, the option enables holders to look back over time to determine the payoff
amount. The two types of lookback options are floating strike where the strike price is determined at maturity
and fixed strike where the strike price is fixed.
Lookback options are most commonly used on major U.S. index equities and futures, providing investors with a way
to avoid timing issues. Since they remove that risk, these options command a much higher premium than traditional
options. Lookback options are also only settled in cash, since they involve looking into the past to determine the
trades current profitability and timing.

*The final difference between exotic options and regular options has to do with how they trade. Regular options
consist of calls and puts and can be found on major exchanges such as the Chicago Board Options Exchange. Exotic
options are mainly traded over the counter, which means they are not listed on a formal exchange, and the terms
of the options are generally negotiated by brokers/dealers and are not normally standardized as they are with
regular options.
Rainbow Options: Rainbow options differ from traditional options in that they are linked to two or more underlying
assets. In order for the option to become profitable, all of the underlying assets must move in the predicted direction.
For example, a rainbow option might allow the buyer to exchange 10 shares of MSFT for one share of IBM, which
means theyd make money if MSFT shares rose relative to IBM shares.
Rainbow options are most commonly used when valuing natural resources, since they depend on both the price of
the natural resource and how much of the resource is available in a deposit. Traders use rainbow options to bet on
both the price and quantity of a natural resource deposit before the option will take effect. Of course, the use of
two variables makes these options riskier than traditional options.

Benefits Vs. Drawbacks

When it comes to pricing options, traditional options can be priced using the Black-Scholes option pricing formula.
Exotic options can't be priced as easily, at least not with a measure as widely accepted as the Black-Scholes. This can
serve as a benefit as well as a drawback, as the inherent mispricing of exotic options may either work for or against
the investor.
Another dilemma is the availability and risk of liquidity one takes on with exotic options. While some exotic options
have fairly active markets (the binary option) others are mostly thinly-traded over-the-counter instruments. Some
might even be pure dual-party transactions, with no liquidity, as names are stated in the underlying contract.
The Bottom Line
Exotic options have unique underlying conditions that make them a good fit for high-level active portfolio
management and situation-specific solutions. Complex pricing of these derivatives may give rise to arbitrage, which
can provide great opportunity to sophisticated quantitative investors. There are many varieties of exotic options,
too numerous to describe here, but if you know how to use them, you can learn to profit from nearly any trading
scenario.
-Exotic options provide a great way for traders to take advantage of different trading dynamics that traditional
options cant address. However, the trade-off is that these options almost always trade over-the-counter, are less
liquid than traditional options, and are significantly more complicated to value.
In the over-the-counter (OTC) market , virtually every term of option contracts is negotiated, but this greatly reduces
liquidity of the option. To increase liquidity and trading activity, organized exchanges standardized the terms of
option contracts, such as the number of shares that each contract represents, or the strike prices that are allowable.
Most option contracts traded on exchanges are just called puts and calls, and, in most cases, the trader simply
specifies strike price, expiration month, and quantity. However, there are some contracts that differ significantly
from the standardized options traded on exchanges, but that have terms common enough to warrant their own

names, and are grouped under the genus exotic options, contrasting them to the standardized vanilla options,
sometimes called more verbosely as plain-vanilla options.
Exotic options, traded in the OTC market, are either variations of the simple call and put options traded on organized
exchanges, and usually have a European-style exercise option, when the option can only be exercised at or near the
end of the contract term, or they are structured products with an optional component. Structured products are
financial instruments that were created to satisfy a need for hedging under specific circumstances, and usually
involves the use of derivatives.
Most exotic options are foreign-exchange options (aka FX options), and provide better hedging characteristics for
certain business activities involving foreign exchange, but may be used by speculators for profit as well. Most FX
options involve currency pairs where at least 1 of the currencies is a minor currency. Some of these options may be
extremely volatile because of economic instability or political unrest in the country of the minor currency. The
following explains the most common exotic options, but is, by no means, a complete list.
Basket options give the holder the right to receive 2 or more foreign currencies for a base currency for a designated
or spot rate.
Compound options are options on options that give the holder the right to acquire another option by a specific date
and for a specific premium. There are calls on calls, puts on puts, calls on puts, and puts on calls. Compound options
are used by corporations to hedge foreign exchange risk for a business venture that may or may not occur.
Bermuda options have an exercise option that is somewhat between that of American- and European-style options.
(Supposedly, the name Bermuda derives from the islands location between the United States and Europe.) Whereas
an American-style option can be exercised any time before expiration and a European option can only be exercised
on or near the expiration date, a Bermuda option can only be exercised on specific days before expiration or on the
expiration date. For instance, a Bermuda option may allow exercise only on the 1st day of each month before
expiration, or on expiration.
Binary options (aka: digital options, fixed-return options, all-or-nothing options, cash-or-nothing options, assetor-nothing options) are so-called because their payouts depend on whether a condition is true or false, with the
false condition usually paying nothing to the holder of the binary option. Every other characteristic of a binary option
depends on the contract on which it is based, which, in turn, depends on the writer of the contract, or, with a
standardized contract, upon the standard set by an exchange. In the United States, most exchange traded binary
options pay either $0 or $100 at expiration. Most binary options are not classified as puts or calls. Although there
are exceptions, little is gained by classifying a binary option as a put or call since each option has only 2 possible
values at expiration. Instead, a typical binary option is in the money if the price of the underlying is either at the
strike price or above. If the binary option remains in the money at expiration, then the holder of the binary option
receives $100; if the price of the underlying is below the strike price at expiration, then the long position receives
nothing, and the binary option writer the short position gets to keep the premium for selling the option;
otherwise, the short position must pay the long position $100, requiring the short trader to pay an additional amount
equal to $100 minus the premium received for selling the option, which is the maximum amount that the short
trader can lose in the transaction. The maximum potential loss for the long trader is the premium paid for the option.
The value of the binary option will vary from $0 to $100 before expiration, depending on how close the value of the
underlying asset was to the strike price and on how much time remained until expiration. So if a trader sold a binary
option for $25, and the option expires in the money, then the trader must pay an additional $75 to settle the trade.
The trader who bought the option for $25 would earn a profit of $75, equal to the $100 payout minus the $25 paid
for the option. If the trader expected the price of the underlying asset to decline, then, rather than buying a put, the
trader would simply sell the binary option, taking the short position. If the trader expected the price to increase
beyond a certain level by a certain time, then the trader would buy the binary option with a strike price equal to the
minimum expected price at expiration.

Best-of-two options depends on 2 different securities or indexes; and better-of-two options pays off according to
the better performing security or index.
An Asian option (synonyms: average rate option, average price option) pays according to the average value of the
underlying during the contract period. A business would use this option to hedge against price increases or decreases
over a certain period, but must buy and sell the underlying asset every day or more frequently than the available
expiration dates for options or futures. Asian options pay off according to the following formula:
Average Price = Maximum (Average Spot Price Strike Price, or 0)
A ladder option (synonyms: step-lock option) allows the holder to lock in gains in the underlying during the contract
period.
A lookback option pays according to the highest value reached by the underlying during the contract period. Some
lookback options use the highest value reached by the underlying during the contract period to determine the
amount of settlement. One formula for the lookback is:
Lookback = Maximum (Spot Price at Expiration Minimum Spot Price over Term of Contract, or 0)
Another formula for the lookback uses the lowest value for the spot price.
Lookback = Maximum (Maximum Spot Price Strike Price, or 0)
A lock-out option pays if the value of the underlying does not go beyond a specified value. A double-lockout option
pays if the value of the underlying asset remains confined within a specified range. For instance, a double-lockout
option might pay if the currency pair USD/CHF trades within 1.22 and 1.24 during the term of the contract. If
USD/CHF trades either above or below this range at any time during the term of the contract, then it pays nothing.
A range-accrual option is similar, but it pays according to how many days the value of the underlying asset was above
or below a specified value, or was confined within a specified range.
Barrier options pay off if an asset reaches a certain price. Knock-in options are created with predetermined
characteristics when the underlying reaches a certain price. Knock-out options are options that terminate if the
underlying reaches a certain price. Since the option ceases to exist, there is no payoff even if the price moves back
within the knock-out barrier before the original expiration. Thus, an option with a knock-out barrier has a maximum
specified value and payoff.

Single-barrier options have a single trigger price that is either above or below the strike price, and double-barrier
options have trigger prices that are above and below the strike price.
Because the option may either not come into existence or pass out of existence, barrier options are generally
cheaper than standard options, with the double-barrier option being cheapest. Most exotic FX options are barrier
options.
A double-trigger option, often used for insurance purposes, pays off only if 2 events occur. A company or an
insurance company will buy this option to limit losses that are very unlikely, but would be very expensive if they both
occurred. An example would be if a company had a large property loss in a foreign country where changes in the
foreign exchange rate made the loss much more expensive.
Weather options pay off for unusual weather. Many businesses that are affected by the weather, such as utilities
and ski resorts, use these options to keep cash flow more consistent.