Cliquet
Encyclopedia
A cliquet option or ratchet option is an exotic option
consisting of a series of consecutive forward start options. The first is active immediately. The second becomes active when the first expires, etc. Each option is struck at-the-money when it becomes active.
A cliquet is, therefore, a series of at-the-money options but where the total premium is determined in advance. A cliquet can be thought of as a series of "pre-purchased" at-the-money options. The payout on each option
can either be paid at the final maturity
, or at the end of each reset period.
Exotic option
In finance, an exotic option is a derivative which has features making it more complex than commonly traded products . These products are usually traded over-the-counter , or are embedded in structured notes....
consisting of a series of consecutive forward start options. The first is active immediately. The second becomes active when the first expires, etc. Each option is struck at-the-money when it becomes active.
A cliquet is, therefore, a series of at-the-money options but where the total premium is determined in advance. A cliquet can be thought of as a series of "pre-purchased" at-the-money options. The payout on each option
Option (finance)
In finance, an option is a derivative financial instrument that specifies a contract between two parties for a future transaction on an asset at a reference price. The buyer of the option gains the right, but not the obligation, to engage in that transaction, while the seller incurs the...
can either be paid at the final maturity
Maturity (finance)
In finance, maturity or maturity date refers to the final payment date of a loan or other financial instrument, at which point the principal is due to be paid....
, or at the end of each reset period.
Example
- A three-year cliquet with reset dates each year would have three payoffs. The first would payoff at the end of the first year and has the same payoff as a normal ATM option.
- The second year's payoff has the same payoff as a two-year option, but with the strike priceStrike priceIn options, the strike price is a key variable in a derivatives contract between two parties. Where the contract requires delivery of the underlying instrument, the trade will be at the strike price, regardless of the spot price of the underlying instrument at that time.Formally, the strike...
equal to the stock price at the end of the first year. - The third year's payoff has the same payoff as a three-year option, but with the strike price equal to the stock price at the end of the second year.