Cliquet

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Cliquet

A series of forward start options in which the first option is active (and its strike price is set) immediately. The second option becomes active on the expiration date of the first option, with the strike set as the market value of the underlying on that day. The process continues for as many options as exist in the cliquet. Importantly, the entire premium is paid at once. Cliquets are useful for an investor who wants to lock in an option for a significant period of time, with the strike price adjusting to reflect market realities. It is also known as a reset option or a ratchet option.
References in periodicals archive ?
Kapoor, 2008, "Optimal Dynamic Hedging of Cliquets," Working Paper.
Cliquet options, in this sense, are heavily traded in the markets, especially as building blocks for many structured products.
Generally speaking, cliquet options are appealing to investors because they inherit, at least partially, the very attractive payoff of lookback options, while rendering it both more affordable and more flexible, thanks to the decrease in the updating frequency of the running extremum of the underlying asset price, as well as to the possible partial and non uniform spanning of the option life.
However, cliquet options raise a number of pricing and hedging issues.
In Section II, the specific properties of cliquet options are highlighted, in comparison with alternative contracts traded in the markets such as lookback, ladder and shout options.
Cliquet options are essentially a form of discretely monitored lookback options, albeit with three differences in practice:
n] = T, one can write the payoff of a cliquet call as follows :
Ratchet options are simply a portfolio of forward starting options, hence they admit perfect static replication, unlike cliquet options (Buetow, 1999; Matosek, 2008).
There are no restrictions on the location of the fixing dates over [0,T] in a cliquet option contract.
What: If you trade cliquets or other exotics that are heavily dependent on the forward skew, it's crucial to understand current quantitative techniques for calibrating to the forward volatility smile.
Real-world example comparing various models for pricing cliquet options
The book covers implied volatility models, jump diffusion, valuation equations, default risk models, capital structure arbitrage, asymptotics and dynamics of the volatility skew, Cliquet contract examples, forward-skew dependent claims (barrier option valuation), and quadratic variation-based payoffs and VIX futures contracts.