How to classify existing exotic options and design new ones?
Numerous exotic options have been tailor-made over the last twenty years to meet
investors’ specific needs. This article aims to propose an intelligible method for
classifying the most commonly used exotic options. In fact, the proposed classification
method is based on five conditions. Each of these conditions is met by traditional options,
but not always by exotic ones. Options for which the same conditions are not met can be
regrouped within the same class. In this way, all options, either traditional or exotic, can
be assigned into one and only one of the thirty-two option classes. The proposed method
has the advantage to enable 72 existing exotic options to be classified. It can also help to
facilitate the design of new exotic instruments that are hitherto unexplored.