First generation exotics are a breed of exotics that has developed as simple or standard additions/ features to derivatives (as opposed to second-generation exotics that have more sophisticated or complicated additions/ features). The main examples of first generation exotics include:
- Digital options, barrier options, touch options (one-touch options (OT options), no-touch options (NT options), double one-touch options (DOT options), double no-touch options (DNT options), early knock-out options (EKO options), knock-in knock-out options (KIKO options), knock-out options (KO options), knock-in options (KI options), reverse knock-out options (RKO options), reverse knock-in options (RKI options), double-knock out options (DKO options), double knock-in options (DKI options), etc.
- Chooser options, quanto options, power options, lookback options, etc.
- Average rate options (AROs), Asian options (fixed-strike Asian options, floating-strike Asian options, etc).
For example, a barrier option may be set to knock in or out if the underlying hits a barrier (or one of two barriers). Likewise, touch options including one-touch options and no-touch options pay a fixed amount of if the underlying price ever/ never trades at or through the touch-level (barrier) and nothing if it doesn’t/ does.
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