Terminology: exotic options

In Finance, “Exotic” options refer to a class of options that have more complicated payoff functions than the “standard” (often called “vanilla”) European and American options.

Example:

Common types include chooser options, compound options, barrier options, digital options, Bermuda options, quantity-adjusting options, look-back options, Asian options, basket options, extendible options, spread options, shout options, range options etc.

Origins:

The terminology “Exotic” options became popular in the 1990s in the field due to Berkeley professor Mark Rubinstein’s working paper, Exotic Options. According to Rubinstein, one possible explanation for the term “Exotic” is that in 1987, executives at the Tokyo office of an American bank sold an option that was unlike the European and American versions, which is now known as the Asian option. Like the terms “European” and “American” options, Rubinstein decided to give a name based on geographic origins.

Another possible explanation for the term comes from exotic wagers in horse racing. In the 1970s and early 1980s, Rubinstein was researching a racetrack-betting tactic that guaranteed profits and the term “Exotic” may come from that earlier work.

Decolonising the curriculum:

The terminology “Exotic” has shown the impact of colonisation on learning and teaching. We seek to both recognise and address the terminologies that have arisen from historic global domination by ‘The West’. The term “Exotic” emphasises the fact that Western countries are positioned at the centre and dominate the content taught in high-level education, this may potentially impact the social inequality in mathematics academia and community. We would like to address and raise awareness of the West-centric biases that have been previously ignored in the field.

In this case, the term “Exotic” is removed from the course and the lecture notes, nevertheless you may still find the use of terminology due to its popularity in textbooks, websites and beyond.