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Chooser option

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Title: Chooser option  
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Subject: Options (finance), Amortising swap, Ratio spread, Commodore option, Inflation swap
Collection: Options (Finance)
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Chooser option

In finance, a chooser option is a special type of option contract. It gives the purchaser a fixed period of time to decide whether the derivative will be a European call or put option.

In more detail, a chooser option has a specified decision time t_1 , where the buyer has to make the decision described above. Finally, at the expiration time t_2 the option expires. If the buyer has chosen that it should be a call option, the payout is max(S-K,0) . For the choice of a put option, the payout is max(K-S,0) . Here K is the strike price of the option and S is the stock price at expiry.

Replication

For stocks without dividend, the chooser option can be replicated using one call option with strike price K and expiration time t_2 , and one put option with strike price K e^{-r(t_2-t_1)} and expiration time t_1 ;.[1]

References

  1. ^ Yue-Kuen Kwok, Compound options

Bibliography

  • Yue-Kuen Kwok, Compound options (from Derivatives Week and Encyclopedia of Financial Engineering and Risk Management) [1]
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