compound option

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Compound option

Option on an option.

Compound Option

An option contract on an option contract. There are four basic types: a call on a call; a put on a call; a call on a put; and a put on a put. A compound option has two expiration dates and two strikes. There are also two premiums: one paid up front and the other paid if the underlying option is exercised. It is often used in markets where there are doubts on the risk for the underlying option, such as currency or fixed income markets. It is also called a split-fee option.

compound option

An option to purchase an option. Examples include, a call on a call option or a call on a put option. A fee must be paid to buy a compound option and a second payment must be made to the owner of the option in the event the compound option is exercised. Also called split-fee option. See also back fee, front fee.
References in periodicals archive ?
It will be easy to make out team strategy however as the different tyre compound options will be clearly colour coded - the colour of the Pirelli PZERO logo on the tyre will be red for super soft,yellow for soft, white for medium, silver for hard, light blue for intermediates and orange for wets.
This paper examines the empirical performance of various option-pricing models in hedging exotic options, such as barrier options and compound options.
Second, the test is based upon the performance of the models in hedging exotic options, such as barrier options and compound options.
Compound options generate other options among exercise.
A first example of compound options can be found in a staged investment, which may be assimilated to a sequence of stages where each stage is contingent on the completion of its predecessor.
We show how these options can be valued as portfolios of standard and compound options written on the stock of an otherwise similar company without warrants and derive a closed-form solution for the Black-Scholes model.
In addition to options to defer, expand, extend, contract, or abandon projects, there are also switching options; compound options, which are options on options; and rainbow options, which embody several types of uncertainty.
In general, compound options involve sequenced or staged investments.
Mondher Bellalah presents a simple framework for the valuation of compound options within a context of incomplete information.
The seven basic real options can also occur in combinations, as compound options.
8 These options are, in fact, options on options, or compound options (see Geske |5~).
This paper presents a simple framework for the valuation of compound options within a context of incomplete information.