1 Exotic options Besides the standard options – commonly referred to as vanilla options – Saxo Bank also offers exotic options. • Knockout minimum ticket fee threshold = 50.000 base currency • Reverse knockout minimum ticket fee threshold = 50.000 base currency • Double knockout minimum ticket fee threshold = 50.000 base currency • Knock in minimum ticket fee threshold = 50.000 base currency • Reverse knock in minimum ticket fee threshold = 50.000 base currency • One-touch minimum ticket fee threshold = 5.000 base currency payout • No-touch minimum ticket fee threshold = 5.000 base currency payout • Double no-touch minimum ticket fee threshold = 5.000 base currency payout KNOCK OUT (minimum ticket fee threshold: 50.000 base currency nominal) Knock out – an option that automatically expires worthless should a specified barrier level be traded at or beyond before expiry. The spot moves towards "out-of-the-money" in order to reach out-strike. A = Strike B = Barrier Knock Out Call example Anticipating an increase in the spot, the investor buys a one-month EUR/USD Call with a strike of 1.3700 and an outstrike of 1.35. The risk of the KO Call as opposed to vanilla Call is that the 1.35 level is touched which would terminate the contract immediately. For a bought option this is the risk the investor takes in order to receive the 20 pips discount comparing to a vanilla. Below is shown the specifics of the trade and the Greeks development within 3 different timeframes. Trade details: Currency: EURUSD Type: KO Call Strike: 1.3700 Knock Out: 1.3500 Expiry: 2 August 2007 Amount: EUR 1.000.000 Spot Ref: 1.3620 on 4 July 2007 Price: 38/ 42 (vanilla call, strike 1.37 for 2 Aug 2007 is 55/ 62) 2 3 Knock Out Put example Anticipating a decrease in spot, the investor buys a one-month EUR/USD Put with a strike of 1.3600 and an outstrike of 1.3750. The risk of the KO Put as opposed to vanilla Put is that the 1.3750 level is touched which would terminate the contract immediately. For a bought option this is the risk the investor takes in order to receive the 20 pips discount comparing to a vanilla. Below is shown the specifics of the trade and the Greeks development within 3 different timeframes. Trade details: Currency: EURUSD Type: KO Put Strike: 1.36 4 Knock Out: 1.3750 Expiry: 2 August 2007 Amount: EUR 1.000.000 Spot Ref: 1.3620 on 4 July 2007 Price: 42/ 50 (vanilla put, strike 1.36 is 64/ 70) 5 REVERSE KNOCK OUT (minimum ticket fee threshold: 50.000 base currency nominal) Reverse knock out (also called a “Kick Out”) – an option that automatically expires worthless should a specified barrier level be traded at or beyond before expiry. Reaches the out-strike when the spot moves towards "in-the- money". Knock-Out and Reverse knock-out are the same, but opposite: • For a straight Knock-out, the barrier is set "out-of-the-money" (i.e. below strike price for call and above strike price for put). • For a Reverse Knock-out, the barrier is set "in-the-money" (i.e. above strike price for call and below strike price for put). To create a Reverse knock-out on SaxoTrader, simply adjust the strike price. 6 Reverse Knock Out Call example Being mildly bullish on GBPUSD and mildly bearish on volatility for the next month the investor can choose to buy a Reverse Knock Out Call. The low premium is due to the risk that the 2.05 barrier will be touched thereby immediately terminating the option (which would then be ITM by 200 pips). For investors selling options the low premium received is due to the 2 profit-opportunities. The seller will make money if spot either drops (he sold a Call) or if spot moves much higher (option terminates at 2.05 and leaving the seller with his premium intact). Trade details: Currency: GBPUSD Type: RKO Call Strike: 2.0300 Reverse Knock Out: 2.05 Expiry: 2 August 2007 Amount: GBP 1.000.000 Spot Ref: 2.0180 on 4 July 2007 Price: 5/ 18 pips (vanilla call, strike 2.03 for 2 Aug 2007 is 53/ 62) 7 8 Reverse Knock Out Put example Being mildly bearish on GBPUSD and mildly bearish on volatility for the next month the investor can choose to buy a Reverse Knock Out Put. The low premium is due to the risk that the 1.9800 barrier will be touched thereby immediately terminating the option (which would then be ITM by 200 pips). For investors selling Reverse Knock Out options the low premium received is due to the 2 profit-opportunities. The seller will make money if spot either increase (he sold a Put) or if spot moves much lower (option terminates at 1.9800 and leaving the seller with his premium intact). Trade details: Currency: GBPUSD Type: RKO Put Strike: 2.0100 Reverse Knock Out: 1.98 Expiry: 2 August 2007 Amount: GBP 1.000.000 Spot Ref: 2.0180 on 4 July 2007 Price: 21/ 33 pips (vanilla put, strike 2.01 for 2 Aug 2007 is 69/ 78) 9 10 DOUBLE KNOCK OUT (minimum ticket fee threshold: 50.000 base currency nominal) Double knock out – an option that automatically expires worthless should one of the 2 specified barriers are traded at or beyond before expiry. Double Knock Out Call example Being mildly bullish USDJPY and very bearish on volatility the investor can choose a DKO which offers a very strong discount compared to vanillas. Naturally this is because of the risk of being knocked out if spot doesn’t follow a very specified and predetermined path – cannot go too low nor too high because of the DKO. Also the maximum payout is limited to 125.99-122.50 = 349 pips intrinsic value less 29 pips paid for the option = 320 pips Trade details: Currency: USDJPY 11 Type: DKO Call Strike: 123.00 DKO: 121 : 126 Expiry: 2 August 2007 Amount: USD 1.000.000 Spot Ref: 122.50 on 4 July 2007 Price: 19/ 29 pips (vanilla call, strike 123 for 2 August is 46/ 54) 12 Double Knock Out Put example Trade details: Currency: USDJPY Type: DKO Put Strike: 121 DKO: 118 : 124 Expiry: 2 August 2007 Amount: USD 1.000.000 Spot Ref: 122.50 on 4 July 2007 Price: 16/ 25 pips (vanilla put, strike 121 for 2 August is 57/ 65) 13 14 KNOCK IN (minimum ticket fee threshold: 50.000 base currency nominal) Knock in – an option that automatically becomes a normal vanilla option when a specified barrier level is traded at or beyond before expiry. The in-strike barrier is reached when the spot moves towards "out-of-the-money". 15 Expecting bullish but volatile GBPUSD, the investor can choose to buy a Knock In Call. Since the investor expects a volatile market he expects that the In-Strike will be touched in a move lower only to head higher after a period (this scenario is frequently seen around US data releases). If touched, the payoff of the option “transforms” into normal vanilla call option with the same strike and maturity. The risks are of course if the markets doesn’t move lower and knocks in the option. Knock In Call example Trade details: Currency: GBPUSD Type: KI Call Strike: 2.02 KI: 2.0000 Expiry: 5 October 2007 Amount: GBP 1.000.000 Spot Ref: 2.0180 on 4 July 2007 Price: 66/ 85 pips (vanilla call, strike 2.0200 for 5 October 2007 is 167/ 177) 16 17 Knock In Put example Expecting bearish but volatile GBPUSD, the investor can choose to buy a Knock In Put. Since the investor expects a volatile market he initially chooses an In-Strike which he expect will be touched in a move higher only to head lower after a period (this scenario is frequently seen around US data releases). If touched, the payoff of the option “transforms” into normal vanilla put option with the same strike and maturity. The risks are of course if the markets doesn’t move higher and knocks in the option. Trade details: Currency: GBPUSD Type: KI Put Strike: 2.0100 KI: 2.0300 Expiry: 5 October 2007 Amount: GBP 1.000.000 Spot Ref: 2.0180 on 4 July 2007 Price: 88/ 107 pips (vanilla call, strike 2.0200 for 5 October 2007 is 168/ 177) 18 19 REVERSE KNOCK IN (minimum ticket fee threshold: 50.000 base currency nominal) Reverse knock in (also called a “Kick In”) – an option that automatically becomes a normal vanilla option when a specified barrier level is traded at or beyond before expiry. Reaches in-strike when the spot moves towards "in- the-money". Knock-in and Reverse Knock-in are the same, but opposite: • For a stright Knock-in, the barrier is set "out-of-the-money" (i.e. below strike price for call and above strike price for put). • For a Reverse Knock-in, the barrier is set "in-the-money" (i.e. above strike price for call and below strike price for put). 20 To create a Reverse knock-out on SaxoTrader, simply adjust the strike price. Anticipating that EURUSD will move significantly higher (perhaps around a breakout of an important technical level) the investor can buy a Reverse Knock In Call. If the In-Strike is touched the option will “transform” into a normal vanilla Call option with the same strike and maturity as the Reverse Knock In Call. The discount in premium must be seen in relation to the risk of In-Strike never being reached; hence in that case the option will expire worthless. Reverse Knock In Call example Trade details: Currency: EURUSD Type: KI Call Strike: 1.3650 KI: 1.4000 Expiry: 6 August 2007 Amount: EUR 1.000.000 Spot Ref: 1.3620 on 4 July 2007 Price: 26/ 36 pips (vanilla call, strike 1.3650 for 6 August 2007 is 88/ 96) 21 22 Reverse Knock In Put example Anticipating that EURUSD will move significantly lower (or having a long spot position that requires a hedge) the investor can buy a Reverse Knock In Put. If the In-Strike is touched the option will “transform” into a normal vanilla Put option with the same strike and maturity as the Reverse Knock In Put. The discount in premium must be seen in relation to the risk of In-Strike never being reached; hence in that case the option will expire worthless. Trade details: Currency: EURUSD Type: RKI Put Strike: 1.3600 KI: 1.3300 23 Expiry: 6 August 2007 Amount: EUR 1.000.000 Spot Ref: 1.3620 on 4 July 2007 Price: 26/ 36 pips (vanilla put, strike 1.3600 for 6 August 2007 is 64/ 72) 24 ONE TOUCH OPTION (minimum ticket fee threshold: 1.000 base currency payout) One touch (also called “Lock In” or “Touch Digital”) – an option that gives an investor a payout once the price of the underlying asset reaches or surpasses a predetermined barrier. This type of option allows the investor to set the level of the barrier, the time to expiration and the payout to be received once the barrier is broken. Only two outcomes are possible with this type of option: 1) the barrier is breached and the investor collects the full payout agreed upon at the outset of the contract, or 2) the barrier is not breached and the investor losses the full premium paid to Saxo Bank. 25 Buying a 1-month One Touch downside in EURCHF with trigger of 1.6400 nets a Risk/Reward ratio is 1:2.8. With a notional amount of 10.000 EUR the premium paid is 3.500 EUR and net profit if successfully touched is 6.500 (payout premium less premium paid). This type of option can be used in highly speculative or for hedging purposes. One Touch example Trade details: Currency: EURCHF Type: OT Barrier: 1.6400 Expiry: 6 August 2007 PayOut Amount: EUR 10.000 Spot Ref: 1.6550 on 4 July 2007 Price: 30% / 35% (meaning approximately money back 3 times if investor BUYS this option (100/35 = 2.8)). 26 27 NO TOUCH OPTION (minimum ticket fee threshold: 1.000 base currency payout) No touch (also called “Lock Out”) – an option that gives an investor a payout at expiry only if the spot rate has NOT traded at or beyond the touch-barrier before expiry. Only two outcomes are possible with this type of option: 1) the barrier is breached and the investor collects the full payout agreed upon at the outset of the contract, or 2) the barrier is not breached and the investor losses the full premium paid to Saxo Bank. No Touch example Expecting either a ranging or directional market the speculator can profit by using No Touch options without the normal un-limited risk of selling vanilla options. If the investor expects either a quiet (low volatile) or declining market one way to profit – without having unlimited loss risk – is to buy a No Touch as the speculator gets payout in cash if the barrier level specific in the option is never traded. Trade details: Currency: EURUSD Type: NT Barrier: 1.38 Expiry: 5 October 2007 PayOut Amount: EUR 10.000 Spot Ref: 1.3620 on 4 July 2007 Price: 30% / 35% (meaning approximately money back approximately 3 times if investor BUYS this option (100/ 35 = 2.8)). 28 29 DOUBLE NO TOUCH OPTION (minimum ticket fee threshold: 1.000 base currency payout) Double no touch (also called “Range Binary” or “Double Lock Out”) – an option that gives the investor a payout at expiry if the price of the underlying asset does NOT reach or surpass one of two predetermined barrier levels. This type of option allows the investor the right to choose the level of the barriers, the time to expiration, and the payout to be received if the price fails to breach either barrier. Only two outcomes are possible with this type of option: 1) the barrier is breached and the investor collects the full payout agreed upon at the outset of the contract, or 2) the barrier is not breached and the investor losses the full premium paid to Saxo Bank. 30 Double No Touch example An investor expecting range trading in USDCHF over next 3 months could profit from this by buying a 3-month 1.1800 – 1.2400 Double No Touch. Hence, the Risk/Reward ratio for the holder becomes 1:4.5. If the investor buys such an option for the amount of 10.000 USD at a premium of 2.500 EUR he will receive a net profit of 7.500 USD (the difference between the payoff and the premium) if his prediction of range trading holds up. This option hold many similarities to selling a strangle however does not hold un-limited risk potential and legally constitutes buying options as opposed to selling options (in case of a strangle). Trade details: Currency: USDCHF Type: DNT Upper Barrier: 1.2400 Lower Barrier: 1.1800 Expiry: 5 October 2007 PayOut Amount: USD 10.000 Spot Ref: 1.2160 on 4 July 2007 Price: 18% / 22%% (meaning approximately money back approximately 4.5 times if investor BUYS this option (100/ 35 = 4.5)). 31 32