Simple Chooser Option Evaluation

Abstract

Financial instruments traded in the markets and investors' situations in such markets are becoming more complex. The paper examines the main aspects of options, emphasizing the variety of exotic options and their place in financial markets and the risk management process. As the exact valuation of exotic options is quite difficult, the article deals with the theoretical and practical aspects of pricing of chooser options that suggest a broad range of usage and application in different market conditions. It gives traders a generic view of European style vs American Style Options and simulates the Simple Black-Scholes Model. It is introduced with the simple example of the pricing of 'European call options on a no-dividend stock, and the simulation results are compared with an analytical solution. The calculations made in this article showed the price of Apple Inc. (AAPL) at one-year maturity, and it is closely correlated with the chosen time and less correlated with its strike price. Finally, this paper introduces Chooser Options and provides a pricing spreadsheet. Chooser options give the investor the privilege of choosing whether the option is a put or a call at some predetermined date. Generally, the investor chooses the more valuable option.