Coupe Options

Pricing || Binomial Method || Monte Carlo Simulation || Finite Differences Method || Known Names / Variants || References

Coupe options and cliquet / ratchet options are almost identical in nature with one key distinction.

Going back to our consideration of cliquet options, we noted that these type of options had periodic reset dates in which the profit was locked in to the new price level. Payout to the holder could take place either at these prespecified dates or at maturity. Coupe options have these exact same characteristics, except that instead of reset the strike to the current spot level, the coupe option will reset itself to the worse of the current spot level and the initial strike price.

Pricing:

Pricing of coupe options depend on primarily the predetermined number of reset dates; the higher this number is, the more expensive it will be. Because the reset value is the worse of either the spot level or the initial strike price, pricing a coupe using the same method as cliquet / ratchet options would not be a valid technique. That is, the use of a series of forward start options would likely misstate the price of coupe options as forward starts do not take into account the worse of factor.

Binomial Method:

Extending from the classic Cox, Ross & Rubinstein (1979) binomial tree, we can price coupe options. Upwards movement in price would tend to produce reset values at each reset date equal to the initial strike price, and downward movements are likely to result in the reset value being equal to the current spot price. With this under consideration, it is relatively easy to determine the a suitable method for pricing under binomial valuation by incorporating the number of reset dates.

Other Known Names / Variants

Binary Cliquet
Branched Cliquet Options
Cliquet Options
Compound Ratchets
Forward Start Option
Ladder Options
Lock-In Option
Moving Strike Options
Period Cliquet
Ratchet Options
Roll Options
Spread Cliquet
Time-Switch Option

Additional/Useful List of resources

Papers:

Black, F. & Scholes, M. "The Pricing of Options & Corporate Liabilities", The Journal of Political Economy (May '73)
Cox, J., Ross, S., & Rubinstein M., “Option Pricing: A Simplified Approach." Journal of Financial Economics, 7. (Sept '79).
Hull, J., "Options, Futures & Other Derivatives", 5th Edition 2002 - Chapter 12