Menu
Member area
Derniers billets
No items to display
Blog
Annuaire
Vidéos récentes
No items to display
Vidéos
Derniers messages
No items to display
Forum
- Volatility Derivatives 1
- The world of Structured Products 4
- Library of Structured Products 0
- Table of Contents
- Vanilla Options
- Volatility, Skew and Term Stru
- Option Sensitivies: Greeks
- Option Strategies
- Correlation
- Dispersion Options
- Barrier Options
- Digitals
- Autocallable Structures
- The Cliquet Family
- Home /
- Quanto / Compo / Flexo/ ... /
- Composite Options /
- Introduction
Introduction
The composite option is designed for investors who:
- want to execute an option strategy on a foreign stock
- want to fix the strike in their own currency
- get the payout of the option in their own currency
In contrast to the quanto option, the holder of a composite option has exposure to the FX rate.
One of the reasons that a composite option is traded is to protect the value in their own currency on a foreign investment.
Example:
US investor owns GSK stock (GBP).
- GSK stock = 13£
- FX rate = 2 USD/GBP --> $ value of one share = 26$
To protect this holding, he buys 1Y ATM compo put on GSK @ strike = 26$.
After 1Y, stock goes down to 11£ and the FX rate goes from 2 USD/GBP to 1.5 USD/GBP.
The $ value of GSK has gone down from 26$ to 16.5$.
Because the strike price of the compo option is fixed in $, the $ loss on the shares is totally offset by the payout of the compo put option.
In summary, the holder of a compo option wants to protect the share value in his own currency to both FX rate movements and stock price movements.