79. Exotic Derivatives.Экзотические деривативы.

An exotic derivative is a derivative which has features making it more complex than commonly traded products. These products are usually traded over-the-counter (OTC), or are embedded in structured notes. Often, it is possible, to "manufacture" the exotic derivative out of standard derivatives. They give opportunities for hedging and earning higher return + possibility of constructing more sophisticated products with more sophisticated features out of them.

Exotic forwards:

Range Forward Contract uses a range of exchange rates rather than a single rate. A range forward contract is constructed so that it provides full protection against adverse exchange rate movements.

Exotic options:

Non-standard American Options: 1) Bermudan Options: are exercisable at the date of expiration, and on certain specified dates that occur between the purchase date and the date of expiration. 2) Warrants: gives the holder the right to purchase securities (usually equity) from the issuer at a specific price within a certain time frame. 3) Subscription Right: the right of existing shareholders in a company to retain an equal percentage ownership over time by subscribing to new stock issuances at or below market prices. 4) Deferred Payment Option: the premium is not paid until the exercise date (can be exercised any time).

History-Dependent Derivatives: Asian Options: 1) Average Price Option: the payoff is determined by the average underlying price over some pre-set period of time. 2) Average Strike Option: the strike price is based on an average of the spot rate over a period of time.

Lookback Options: The payoff depends on the optimal (maximum or minimum) underlying asset's price occurring over the life of the option. The option allows the holder to "look back" over time to determine the payoff.

Barrier Options: 1) Up-and-out: spot price starts below the barrier level and has to move up for the option to be knocked out. 2) Down-and-out: spot price starts above the barrier level and has to move down for the option to become null and void. 3) Up-and-in: spot price starts below the barrier level and has to move up for the option to become activated. 4) Down-and-in: spot price starts above the barrier level and has to move down for the option to become activated.

Exotic swaps:

Swaption: The option to enter into an interest rate swap. In exchange for an option premium, the buyer gains the right but not the obligation to enter into a specified swap agreement with the issuer on a specified future date.

Credit swaps and derivatives:

Credit Default Swap: A swap designed to transfer the credit exposure of fixed income products between parties. A credit default swap is also referred to as a credit derivative contract, where the purchaser of the swap makes payments up until the maturity date of a contract. Payments are made to the seller of the swap. In return, the seller agrees to pay off a third party debt if this party defaults on the loan. Total Return Swap: A swap agreement in which one party makes payments based on a set rate, either fixed or variable, while the other party makes payments based on the return of an underlying asset, which includes both the income it generates and any capital gains. In total return swaps, the underlying asset, referred to as the reference asset, is usually an equity index, loans, or bonds. This is owned by the party receiving the set rate payment.