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 ?
The lifetime compound option provides benefit increases of five percent on each anniversary of the insured's coverage.
For our study, we examine two possible options: compound option and deferment option.
F solved from (6) and (7) is the value of a compound option and we denote it [F.
However, the payoff of a barrier option is much more dependent on the joint distribution of the underlying asset price at different points in time than is the payoff for a compound option.
Contingent on the evolution of prices, the project could be halted at each phase, so it can be considered a compound option.
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.
Finally, we consider both investment opportunities as a compound option and calculate the value of the opportunity to complete the investment in First, (G([V.
If the stock is considered as an option on the value of the firm, V, then the value of the call as a compound option can be expressed as a function of the firm's value.
At the end of a year, the spread was even wider, and they exercised their third compound option to complete the project.
These subsequent R&D projects themselves contain options for commercialization and further development, leading to a type of compound option called a growth staircase.