Real Options – Exotic Complex Floating American and European Chooser

File Names: Exotic Complex Floating European Chooser; Exotic Complex Floating American Chooser

Location: Modeling Toolkit | Real Options Models

Brief Description: Values an exotic chooser option with changing parameters

Requirements: Modeling Toolkit, Real Options SLS

A Chooser option is a single option that allows the holder to decide if the option becomes a call or a put at some future time, with different parameters such as different strike levels, essentially creating two options in one where the cost of the single option is lower than purchasing two options.

A more complex Chooser Option can be constructed using the SLS software as seen in Figures 186.1 and 186.2. In these examples, the execution costs of the call versus put are set at different levels. An interesting example of a Complex Chooser Option is a firm developing a highly uncertain and risky new technology. The firm tries to hedge its downside as well as capitalize its upside by creating a Chooser Option. That is, the firm can decide to build the technology itself once the research and development phase is complete or it can sell the intellectual property of the technology, both at different costs. You can also use the SLS software to easily and quickly solve the situation where building and selling off the option each has a different volatility and time to choose.

Figure 186.1: Complex European exotic chooser option using SLS

Figure 186.2: Complex American exotic chooser option using SLS


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