compound option

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 ?
An alternative derivation of the compound option's formula using the martingale Approach
The lifetime compound option provides benefit increases of five percent on each anniversary of the insured's coverage.
From a theoretical point of view, a compound option with several maturities should be taken into account.
The compound option pricing formula proposed by [39] can precisely evaluate the compound option.
Therefore, the option to invest in the cogeneration project is conditional to the expansion option of the original sugar-ethanol project being exercised, creating a compound option problem, which requires both options to be valued simultaneously.
For our study, we examine two possible options: compound option and deferment option.
First, the MRG and the RCP agreements are numerically combined and modeled as repeatedly-exercisable compound option, MRC (MRG-RCP) option, which can be decomposed to the call and put options along with the appropriate financial and mathematical process.
Contingent on the evolution of prices, the project could be halted at each phase, so it can be considered a compound option. When viewed this way, its value was positive, and the company started with the design phase.
The contributions of this paper are the following: Based on an analysis of the changes in the stock price process induced by warrants issuance, we show how standard options on stocks can be valued in this case as a portfolio of standard and compound options. Specifically, we apply Geske's compound option pricing formula to derive a closed-form solution for standard call can put option prices after warrants issuance within the Black-scholes model.
"Many players have bought a compound option under which they have to sell the dollar if it dips below 108.30 yen and buy above 110.50 yen, and thereby were trying to prevent it from hitting these points," he said.
Thus the growth staircase is a compound option. At each stage, it is not clear that an acquisition will provide the anticipated growth platform.
When P < [P.sup.*], the value of the compound option over next interval is: