Compound option

From Wikipedia, the free encyclopedia

Compound option or split-fee option^[1]^[2] is option on an option. The exercise payoff of a compound option involves the value of another option. A compound option then has two expiration dates and two strike prices. Usually, compounded options are used for currency or fixed income markets where insecurity exists regarding the option’s risk protection. Another common business application that compound options are used for—to hedge bids for business projects that may or may not be accepted.

Variants

Compound options provide their owners with the right to buy or sell another option. These options create positions with greater leverage than do traditional options. There are four basic types of compound options:^[3]

Call on Call (CoC)
Call on Put (CoP) or caput option
Put on Put (PoP)
Put on Call (PoC)

References

External links

Derivatives market

Derivative (finance)

Options

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

Vanilla options	Bond option Call Employee stock option Fixed income FX Option styles Put Warrants

Exotic options	Asian Barrier Binary Cliquet Compound option Forward start option Interest rate option Lookback Mountain range Rainbow option Swaption

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

Spreads	Backspread Bear spread Bull spread Box spread Butterfly spread Calendar spread Diagonal spread Ratio spread Vertical spread Intermarket Spread

Valuation	Binomial Black Black–Scholes model Finite difference Garman-Kohlhagen Put–call parity Simulation Trinomial Vanna–Volga pricing

Swaps

Forwards/Futures

Backwardation
Commodity futures
Contango
Currency future
Financial future
Forward market
Forward price
Forward rate
Index future
Interest rate future
Margin
Pricing of Forwards
Pricing of Futures
Single-stock futures

Other derivatives

Market issues

This article is issued from Wikipedia. The text is available under the Creative Commons Attribution/Share Alike; additional terms may apply for the media files.