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Why Are Exotic Options Not So Exotic? Ask the Class

question 19

Essay

Why are exotic options not so exotic? Ask the class to explain why an option described as exotic is merely a standard option with different terms.Ask students to create exotic options that are different than the text examples.


Definitions:

Fair Market Value

The price at which an asset would trade in a competitive auction setting, reflecting the true value as agreed upon by a willing buyer and seller.

RRSP

A Registered Retirement Savings Plan, a Canadian investment account for holding savings and investment assets, with certain tax advantages.

Compounded Annually

Interest calculated once a year on the initial principal and the accumulated interest of previous periods of a deposit or loan.

Deferred Annuity

An insurance product that delays income payments until the investor elects to receive them, which can be many years after the initial investment.

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