File Name: Exotic Options – Options on Options
Location: Modeling Toolkit | Exotic Options | Options on Options
Brief Description: Computes the value of an option on another option, or a compound option, where the option provides the holder the right to buy or sell a subsequent option at the expiration of the first option
Requirements: Modeling Toolkit
Modeling Toolkit Functions Used: MTCompoundOptionsCallonCall, MTCompoundOptionsCallonPut, MTCompoundOptionsPutonCall, MTCompoundOptionsPutonPut, MTGeneralizedBlackScholesCall, MTGeneralizedBlackScholesPut
Options on Options, sometimes known as Compound Options, allow the holder to call or buy versus put or sell an option in the future. For instance, a Put on Call option means that the holder has the right to sell a call option in some future period for a specified strike price (Strike Price for the Option on Option). The time for this right to sell is called the Maturity of the Option on Option. The Maturity of the Underlying means the maturity of the option to be bought or sold in the future, starting from now (Figure 66.1).
Figure 66.1: Compound options on options