Exotic Options: Basics

What attributes of an option determine that it is an exotic option? This is open to interpretation, but a number of factors can lead to an option being deemed exotic. We discuss the main factors here; complex pricing and payoff, complex risk management and hedging, and a limited market in the option. We then give a brief introduction to exotic option trading, and look at the users of exotic options. We conclude by highlighting the main elements that differentiate exotic options from vanilla options.