Exotic derivative

Short description: Derivative which is more complex than commonly traded products

Types of exotic derivative

* Energy derivative
* Freight derivative
* Inflation derivative
* Exotic interest rate option
* Macro derivative
* Weather derivative
* Property derivatives

An exotic derivative, in finance, is a derivative which is more complex than commonly traded "vanilla" products. This complexity usually relates to determination of payoff;[1] see option style. The category may also include derivatives with a non-standard subject matter - i.e., underlying \- developed for a particular client or a particular market.[2]

The term "exotic derivative" has no precisely defined meaning, being a colloquialism that reflects how common a particular derivative is in the marketplace. As such, certain derivative instruments have been considered exotic when conceived of and sold, but lost this status when they were traded with significant enough volume. Examples of this phenomenon include interest rate- and currency-swaps.

As regards valuation, given their complexity, exotic derivatives are usually modelled using specialized simulation- or lattice-based techniques. Often, it is possible, to "manufacture" the exotic derivative out of standard derivatives.[3] For example, a knockout call can be "manufactured" out of standard options; see Barrier option § Valuation. This latter approach may then be preferred, and also allows for a benchmark against which the more specialized models may be verified.

## See also

* Exotic option
* Financial engineering
* Financial innovation
* Structured product

## References

1. ↑ "GARP - Risk Glossary". http://www.garp.org/risk-news-and-resources/risk-glossary/risk-glossary.aspx?p=5.
2. ↑ Understanding derivative contracts: types of derivatives
3. ↑ "Emanuel Derman". http://www.ederman.com/new/docs/risk-markets_and_models.pdf.

## External links

* Understanding derivative contracts: types of derivatives, HM Revenue & Customs
* Exotic Derivatives and Structured Products, Sébastien Bossu, University of Chicago
* Exotic Derivatives , Prof. Jim Gatheral, Baruch College
* Exotic Equity Derivatives Manual, Salomon Smith Barney (1998)
* Guide to Exotic Credit Derivatives, Lehman Brothers
* A Day in the Life of an Exotic Derivatives Trader, quantnet.com

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Derivatives market

Derivative (finance)

Options|

| Terms|

* Credit spread
* Debit spread
* Exercise
* Expiration
* Moneyness
* Open interest
* Pin risk
* Risk-free interest rate
* Strike price
* the Greeks
* Volatility

|

Vanilla options|

* American
* Bond option
* Call
* Employee stock option
* European
* Fixed income
* FX
* Option styles
* Put
* Warrants

Exotic options|

* Asian
* Barrier
* Basket
* Binary
* Chooser
* Cliquet
* Commodore
* Compound
* Forward start
* Interest rate
* Lookback
* Mountain range
* Rainbow
* Swaption

Combinations|

* Collar
* Covered call
* Fence
* Iron butterfly
* Iron condor
* Straddle
* Strangle
* Protective put
* Risk reversal

Spreads|

* Back
* Bear
* Box
* Bull
* Butterfly
* Calendar
* Diagonal
* Intermarket
* Ratio
* Vertical

Valuation|

* Binomial
* Black
* Black–Scholes model
* Finite difference
* Garman–Kohlhagen
* Margrabe's formula
* Put–call parity
* Simulation
* Real options valuation
* Trinomial
* Vanna–Volga pricing

Swaps|

* Amortising
* Asset
* Basis
* Conditional variance
* Constant maturity
* Correlation
* Credit default
* Currency
* Dividend
* Equity
* Forex
* Forward Rate Agreement
* Inflation
* Interest rate
* Overnight indexed
* Total return
* Variance
* Volatility
* Year-on-Year Inflation-Indexed
* Zero Coupon Inflation-Indexed
* Zero Coupon Swap

* Forwards
* Futures

* Contango
* Currency future
* Dividend future
* Forward market
* Forward price
* Forwards pricing
* Forward rate
* Futures pricing
* Interest rate future
* Margin
* Normal backwardation
* Single-stock futures
* Slippage
* Stock market index future

Exotic derivatives|

* Energy derivative
* Freight derivative
* Inflation derivative
* Property derivative
* Weather derivative

Other derivatives|

* Collateralized debt obligation (CDO)
* Constant proportion portfolio insurance
* Contract for difference
* Credit-linked note (CLN)
* Credit default option
* Credit derivative
* Equity-linked note (ELN)
* Equity derivative
* Foreign exchange derivative
* Fund derivative
* Interest rate derivative
* Mortgage-backed security
* Power reverse dual-currency note (PRDC)

Market issues|

* Consumer debt
* Corporate debt
* Government debt
* Great Recession
* Municipal debt
* Tax policy

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