tailieunhanh - Ebook Derivatives markets (2nd edition): Part 2

(BQ) Part 2 book "Derivatives markets" has contents: Exotic options; financial engineering and security design; corporate corporate; real options; monte carlo valuation; the lognormal distribution; the black scholes equation; interest rate models; value at risk,.and other contents. | Exotic Options: I T : u, fruc we have di,cu"ed """dan! option,, futu=, ond 'wap,. By altering the tenru of standard contracts like these, you obtain a "nonstandard" or "exotic" option. Exotic options can provide precise tailoring of risk exposures, and they permit investment strategies difficult or costly to realize with standard options and securities. In this chapter we discuss some basic kinds of exotic options, including Asian, barrier, compound, gap, and exchange options. In Chapter 22 we will consider other exotic options. INTRODU CTION Imagine that you are discussing currency hedging with Sally Smith, the risk manager of XYZ Corp., a dollar-based multinational corporation with sizable European operations . XYZ has a large annual inflow of euros that are eventually converted to dollars. XYZ is considering the purchase of 1 -year put options as insurance against a fall in the euro but is also interested in exploring alternatives. You have already discussed with Smith the hedging variants from Chapters and 3, including different strike prices, a collar, and a paylater strategy. Suppose that Smith offhandedly mentions that XYZ receives large euro payments on a monthly basis, amounting to hundreds of millions of dollars per quarter. In thinking about how to hedge this position, you might reason as follows: "A standard 1 -year put option would hedge the firm against the level of the euro on the one day the option expires. This hedge would have significant basis risk since the price at expiration could be quite different from the average price over the year. Buying a strip of put options in which one option expires every month would have little basis risk but might be expensive. Over the course of the year what really matters is the average exchange nite over this period; the ups and downs around the average rate cancel out by definition. I wonder if there is any way to base an option on the average of the euro/dollar exchange .