A cliquet option or ratchet option is an
exotic option
In finance, an exotic option is an option which has features making it more complex than commonly traded vanilla options. Like the more general exotic derivatives they may have several triggers relating to determination of payoff. An exotic op ...
consisting of a series of consecutive
forward start options. The first is active immediately. The second becomes active when the first expires, etc. Each
option
Option or Options may refer to:
Computing
*Option key, a key on Apple computer keyboards
*Option type, a polymorphic data type in programming languages
*Command-line option, an optional parameter to a command
*OPTIONS, an HTTP request method
...
is struck
at-the-money when it becomes active.
A cliquet is, therefore, a series of at-the-money options but where the total premium is determined in advance. A cliquet can be thought of as a series of "pre-purchased" at-the-money options. The payout on each option can either be paid at the final
maturity, or at the end of each reset period.
[http://docs.fincad.com/support/developerFunc/mathref/cliquet.htm FiNCAD - Cliquet options]]
Example
* A three-year cliquet with reset dates each year would have three payoffs. The first would pay off at the end of the first year and has the same payoff as a normal ATM option.
* The second year's payoff has the same payoff as a one-year option, but with the
strike price
In finance, the strike price (or exercise price) of an option is a fixed price at which the owner of the option can buy (in the case of a call), or sell (in the case of a put), the underlying security or commodity. The strike price may be set ...
equal to the stock price at the end of the first year.
* The third year's payoff has the same payoff as a one-year option, but with the strike price equal to the stock price at the end of the second year.
References
Options (finance)
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