What is this product called?
I know that an option that pays the worst-of payoff of two european option at maturity is a worst of option, but what is the following called? I have seen and did some work on it this past summer but don't remember the name.
A product that pays the worst-of return between two assets, observed daily. meaning let's say
Day 1 -daily return for AAPL was 0.5% and for C was 1% - you get the AAPL return Day 2 - daily return for AAPL was -0.8% and C was -1 %, you get the C return Day 3 - daily return for AAPL was 0.2% and C was 0.1%, you get the C return
and so on for the entire tenor of the instrument, the payout at maturity would be the sum of all the returns.
What is this product called? I did a bunch of backtest on hedges on this product for my desk and am curious to know.
It's not some sort of structured note?
That's an easy one. It's called a Margrabe Option, AKA The Outperformance Option. Basically, it's a means of betting on performance of 2 indexes/stocks/etc. giving the purchaser the right to receive the outperformance of one asset over another asset. So, say you are bearish on the S&P and bullish on the FTSE, you could buy Outperformance Option, and on expiration, you would receive the notional on the option multiplied by the outperformance of the FTSE over the S&P. Likewise, if the S&P outperformed the FTSE, you would see zero payout. The notional value of the option is figured out based on the correlation between the two securities in question. Pretty simple stuff for an exotic option.
@revs I know it is, but i figure since most notes have a name (ELN. range accrual etc), this might have a specific name too and i would like to know it
@Frieds I know what an out-performance option is. But this is not what I am talking about. With what you described, you are taking the outperformance of one specific asset over another over the tenor of the option. With the product I am describing, you are receiving the worst-of (or best-of if you want) return of the two, observed daily, so the return on any given day could come from either asset A or asset B depending on which one's worse performing ON THAT ONE DAY. A way to think of it imo is a cliquet worst-of option (a bunch of forward start worst-of option with one expiring and one starting every day) throughout the tenor of the product.
bumpity bump
bump again... I am sure someone knows
I think it's a Napoleon ELN, which in your case would be a type of worst of daily cliquet. I'm not a 100% on this, I'm not a structurer and don't deal with equity derivs.
Nesciunt omnis officiis soluta sint dolorem fuga saepe. Impedit quas aperiam consectetur error quis esse esse. Sit consequatur qui enim consequuntur culpa alias. Provident reprehenderit alias debitis accusantium.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...