This is the capstone — one graded run across the entire course. The questions roam over everything: how a digital pays all-or-nothing and is the limit of a tight call spread with a delta that blows up at the strike; how barrier options switch on or off when a level is touched, why knock-in plus knock-out rebuilds the vanilla, and why a reverse knock-out is a hedging cliff; how Asian options average the path to get cheaper and harder to game while lookbacks buy hindsight and pay for it; how an autocallable is really a bond plus a strip of digital coupons minus a deep knock-in put, and how memory coupons and worst-of baskets change the deal; how every structured note decomposes into a zero-coupon bond plus an option strip, so a principal-protected note is a bond plus a call and a reverse convertible is a bond minus a put; and where the markup, the forgone dividends, the secondary-market haircut, and the issuer’s credit risk quietly live. There is no formula sheet and no second guess — read all the options before you commit, because each wrong one is a trap that has caught a real buyer.
How this exam works
This is a graded exam. Questions arrive one at a time. Once you submit an answer it is final — there is no going back, no retries, and a wrong answer simply fails that question. Your score stays hidden until the very end, where you need 70% to pass. Slow down and read every option before you commit.
A cash-or-nothing digital call pays a fixed 100 if the stock finishes above the strike and nothing otherwise. What does its payoff diagram look like at expiry?
Select an answer to continue.
Course Recap
Whatever your score reads, the framework you just stress-tested — digitals as all-or-nothing building blocks priced like a probability and hedged with a call spread; barrier options that switch on or off when a level is touched, tied to the vanilla by in–out parity and dangerous through the discontinuous delta of a reverse knock-out; Asians that average the path to get cheaper and ungameable and lookbacks that buy the extreme and pay for it; autocallables that are really a bond plus a strip of digital coupons minus a deep knock-in put, juiced by memory coupons and worst-of baskets; and the master decomposition that turns every structured note into a zero-coupon bond plus an option strip, with the markup, the forgone dividends, the haircut, and the issuer’s credit risk all in plain sight — is the working map of how engineered payoffs are really built, priced, and sold. Here is the whole course in one glance.
Big picture
Exotic Options & Structured Products, in one glance
- Exotic Options & Structured Products
- Digital (binary) options
- All-or-nothing step payoff (cash- or asset-or-nothing)
- Worth the discounted N(d2) — a probability
- The limit of a tight, scaled call spread
- Delta blows up at the strike near expiry (pin risk)
- The atom inside coupon and range triggers
- Barrier options
- Knock-in / knock-out, up / down — path-dependent
- Touch a level to switch the option on or off
- In–out parity: knock-in + knock-out = vanilla
- Cheaper than vanillas (you give a path up)
- Reverse knock-out = a delta cliff at the barrier
- Path-dependent: Asians & lookbacks
- Asian settles on the average of fixings
- Averaging lowers effective vol — cheaper, ungameable
- Arithmetic Asian: no closed form, use Monte Carlo
- Lookback pays the best price in hindsight
- Lookbacks are expensive; Asians are cheap
- Autocallables & cliquets
- Autocall, coupon, and protection barriers
- Coupon = premium on a short deep knock-in put
- Memory defers, not cancels, a missed coupon
- Worst-of baskets juice the coupon, add correlation risk
- Cliquet = strike resets each period (forward vol)
- Structured notes, decomposed
- Every note = zero-coupon bond + option strip
- PPN = bond + a fraction of a call (participation rate)
- Reverse convertible = bond + coupon − a sold put
- Buffer = short put below spot; cap = sold call
- Decompose to price it and see the real risk
- Payoff engineering & hidden costs
- Stack legs to sculpt any bespoke payoff
- Markup leaves day-one value below issue price
- Forgone dividends + secondary-market haircut
- Issuer credit risk: protection is only a promise
- Desks earn on the vol/skew markup, not just fees
- Digital (binary) options
Key Takeaways
What you now own
You can take any engineered payoff apart. You know a digital is an all-or-nothing bet worth the discounted probability of finishing in the money, replicated and hedged with a tight call spread, with a delta that detonates at the strike. You can name the four barrier flavours, use in–out parity to price a knock-in from the vanilla and the knock-out, and explain why a reverse knock-out is a hedging cliff. You can compute an Asian’s average-based payoff and a lookback’s extreme-based payoff, and say exactly why one is cheap and the other dear. You can read an autocallable’s term sheet and see the bond, the strip of digital coupons, and the deep knock-in put you are really short — and what memory coupons and worst-of baskets do to the deal. Above all, you own the master move: every structured note is a zero-coupon bond plus an option strip, so a principal-protected note is a bond plus a call, a reverse convertible is a bond minus a put, and once you decompose it you can price the parts, total the markup, the forgone dividends and the secondary haircut, weigh the issuer’s credit, and answer the only question that matters — what am I really long, what am I really short, and who is getting paid?