An exotic option is a type of option that differs from the typical American or European option ("plain vanilla" options) in the underlying asset or when the investor receives a certain payoff. It is more complex than an exchange-traded option and generally trades over the counter. The exotic options often involves special features and payoff structures that are used to meet specific needs of investors. In situations where investors require an all-or-nothing hedge, where investors need to hedge its exchange rate exposure, and many other situations, exotic options could solve the problem for the investors.
Types of exotic options include: barrier options, Asian options, binary options and compound options, among others.
Exotic options type
- Exotic Option. Investopedia.