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.