World Library  
Flag as Inappropriate
Email this Article

Commodore option

Article Id: WHEBN0024076936
Reproduction Date:

Title: Commodore option  
Author: World Heritage Encyclopedia
Language: English
Subject: Options (finance), Compound option, Diagonal spread, Amortising swap, Cliquet
Collection: Derivatives (Finance), Options (Finance)
Publisher: World Heritage Encyclopedia
Publication
Date:
 

Commodore option


A Commodore option is an exotic option consisting of a number of digital barrier options that pay a coupon if a pre-determined level of the Underlying or Basket of Underlyings is reached. Sometimes the digital barrier increases with the number of years since the trade began. All of the options are active from the start of the trade.

Example

A three-year Commodore Option with annual barriers would have three potential payoffs. The first would pay at the end of the first year and would be dependent on the pre-determined barrier being reached or exceeded. For example, if the Underlying or Basket of Underlyings reached or exceeded 102% of its initial level at the end of year one, a coupon of 6% would be paid. At the end of year two, if the Underlying reached or exceeded 104% of its initial level, another 6% coupon would be paid. The coupon in the final year would be 6% if the Underlying reached or exceeded 106%. The coupon should exceed the performance level of the Underlying, otherwise the investor would achieve the same result by investing directly in the Underlying.

The name comes from the original Commodore option that was linked to the performance of a leading UK Stock Index. The coupons were 6% per annum and the barriers were 102% on the initial level of the index at the end of year 1 increasing by 2% per annum for years 2, 3 and 4. The investor received 3 times the performance the Stock Index, and this structure quickly gained the nickname “Commodore” after the Commodores song “Once, Twice, Three Times a Lady

This article was sourced from Creative Commons Attribution-ShareAlike License; additional terms may apply. World Heritage Encyclopedia content is assembled from numerous content providers, Open Access Publishing, and in compliance with The Fair Access to Science and Technology Research Act (FASTR), Wikimedia Foundation, Inc., Public Library of Science, The Encyclopedia of Life, Open Book Publishers (OBP), PubMed, U.S. National Library of Medicine, National Center for Biotechnology Information, U.S. National Library of Medicine, National Institutes of Health (NIH), U.S. Department of Health & Human Services, and USA.gov, which sources content from all federal, state, local, tribal, and territorial government publication portals (.gov, .mil, .edu). Funding for USA.gov and content contributors is made possible from the U.S. Congress, E-Government Act of 2002.
 
Crowd sourced content that is contributed to World Heritage Encyclopedia is peer reviewed and edited by our editorial staff to ensure quality scholarly research articles.
 
By using this site, you agree to the Terms of Use and Privacy Policy. World Heritage Encyclopedia™ is a registered trademark of the World Public Library Association, a non-profit organization.
 



Copyright © World Library Foundation. All rights reserved. eBooks from Hawaii eBook Library are sponsored by the World Library Foundation,
a 501c(4) Member's Support Non-Profit Organization, and is NOT affiliated with any governmental agency or department.