Hull - Exotic Options

[Johnny Firpo]

Hi David,
just in terms of efficient exam preparation and to the best of your experience so far: can we expect that exam questions on Hull's Exotic Options to be conceptual only (=no calculations)?
Or to be more specific: as the calculations of the different types of options ans the valuations are not easy to capture in a short time would you recommend to spend quite some time to get into this topic in more detail (and to memorize the formulas)?

Know that times are busy at the moment for you and your team, thanks in advance for your support!

 

[David Harper CFA FRM]

Hi Johnny,

Yes, I basically agree. If your agenda is "pass exam" rather than "get practice with exotic pricing," then a deep dive into the quantitative difficulties of exotic pricing will produce a tangible benefit (you'll be aces when it comes to conceptual questions) but will not be a productive use of your time. Firstly, it's only one chapter (Hull 25) and so there will only be a few questions here, at a maximum.

You'll notice the AIM verbs for this reading contain zero "Calculate;" they are only Define/Explain/Describe/Identify (they are exclusively conceptual). That is deliberate by GARP as this reading has years of seasoning in the syllabus.

Please note, we are referring her to pricing (calculations) of exotics, you'll still be on the hook for mechanics. It still requires study to address this mouthful: "Identify and describe the characteristics and pay-off structure of the following exotic options: forward start, compound, chooser, barrier, binary, lookback, shout, Asian, exchange, rainbow, and basket options."

I hope that helps,

 

[hamu4ok]

For myself I created one page slide with a summary of all (I hope) exotic options of Mr John Hull. Decided to share with you.

 

[Alex_1]

Hi @hamu4ok , I am not able to view in my browser the picture you attached in your message, could you try a different form of inserting the picture in the message? Thanks in advance! Alex

 

[hamu4ok]

Hi @hamu4ok , I am not able to view in my browser the picture you attached in your message, could you try a different form of inserting the picture in the message? Thanks in advance! Alex

try open http://i62.tinypic.com/30ij8k2.png

 

[hamu4ok]

A little mnemonic tool to help me and maybe somebody else memorize some of the important EXOTIC OPTION (disclaimer: names of countries and nations are used only in reference to their usage in weird finance world, so no offense) It may not make any sense, but still usefull at least for me

An AVERAGE ASIAN has an option to LOOK-BACK with an attempt to STRIKE the MIN or MAX, or without a strike to LOOK-BACK at the END to the MIN or MAX. Since LOOKING-BACK is too costly, he decides to SHOUT at an European once before the END to enjoy the MAX of two PAYOFFs. Compared to him, a BERMUDAN is like a crippled AMERICAN, if the latter can walk-away at any time, a BERMUDAN is only allowed to leave at specific dates.

 

[Eusignia]

Hi everyone,

I looked into the 2015 FRM Study Guide. As for the Hull chapters, shouldn't the Study Notes cover "Chapter 9. OIS Discounting, Credit Issues, and Funding Costs" instaed of Exotic Options (that one is included in the FRM part I study materials at the moment)?

Thanks,
Irina

 

[ShaktiRathore]

Irina,
I think David has not made the necessary changes in his study material as per the changes in the frm curricullum, thats why this anamoly that u pointed out its better to ask David harper regarding tbe same. Once he make changes that shud be reflectted in the notes.
Thanks

 

[Nicole Seaman]

Hello @Eusignia,

As @ShaktiRathore stated above, we are in the process of updating our materials to coincide with the 2015 curriculum. Please see our announcement HERE regarding the updates.

Thank you,

Nicole

 

[tosuhn]

Hi @hamu4ok love all your one pager slides
just want to thank you for them.

 

[Jaskarn]

@David Harper CFA FRM
Do we have to remember the formulas, given in the notes as well, for exotic options for the exam?

 

[Nicole Seaman]

@David Harper CFA FRM
Do we have to remember the formulas, given in the notes as well, for exotic options for the exam?

Hello @Jaskarn

Please note that I moved your question here to this thread, as I think it may be helpful in answering your question. There is a lot of discussion here about the exotic options chapter and formulas on the exam. I hope this helps!

Thanks,

Nicole

 

[David Harper CFA FRM]

@Jaskarn Over the years, one of our key feedback issues to GARP has been around the "action verbs" in the Learning Objectives. Many formerly quantitative verbs (e.g., calculate) have been softened to qualitative verbs (e.g., Describe). Hull's Chapter on Exotic Options is well seasoned. Below I have copied the learning objectives. Notice how there are no quantitative action verbs; this suggests the exam will not expect you to know their formulas. Although, I will say that (at least) two of them have formulas that you will know if you master the material: the forward start; and the binary option (is easy to test for this reason).

Chapter 26. Exotic Options [FMP–14]
After completing this reading you should be able to:
• Define and contrast exotic derivatives and plain vanilla derivatives.
• Describe some of the factors that drive the development of exotic products.
• Explain how any derivative can be converted into a zero-cost product.
• Describe how standard American options can be transformed into nonstandard American options.
• Identify and describe the characteristics and pay-off structure of the following exotic options: gap, forward start, compound, chooser, barrier, binary, lookback, shout, Asian, exchange, rainbow, and basket options.
• Describe and contrast volatility and variance swaps.
• Explain the basic premise of static option replication and how it can be applied to hedging exotic options.