In finance, a chooser option is a special type of option contract. It gives the purchaser a fixed period to decide whether the derivative will be a European call or put option.
In more detail, a chooser option has a specified decision time , where the buyer has to make the decision described above. Finally, at the expiration time the option expires. If the buyer has chosen that it should be a call option, the payout is . For the choice of a put option, the payout is . Here is the strike price of the option and is the stock price at expiry.
Replication
For stocks without dividend, the chooser option can be replicated using one call option with strike price and expiration time
, and one put option with strike price
and expiration time
;.[1]
References
Bibliography
- Yue-Kuen Kwok, Compound options (from Derivatives Week and Encyclopedia of Financial Engineering and Risk Management) [1]
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