Unlike plain vanilla options with single strike prices and standard expiration dates (e.g., an IBM 100 call option expiring the third Friday in July), exotic options incorporate conditional scenarios regarding both price and time.
The most common forex exotics are: one-touch, no-touch, double one-touch (also known as a “barrier” option), and digital options.
Exotic options are always priced as percent of “payout,” which is calculated in increments of $100 per option if the trade turns out to be correct — i.e., if the currency reaches the designated strike price. For example, if the price of a certain exotic option is 30 percent of payout, the option buyer would pay $30 for the option and receive $100 if the currency pair reached the priced designated in the option’s terms.
Analyzing the different exotic options will illustrate the payout process.
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