Abstract
In this paper we apply expectation method for pricing of some exotic options with three-expiry date using a concept of different (third, second, first) order binary option. At first we introduce the concept of standard options and binary option, then apply them to pricing of some three-expiry exotic options such as, extendable option, cliquet option, chooser option and user defined option. We do not try to get formal solution of the Black-Schole (BS) equation, but explain how to express the expiry payoff of the exotic option as a combination of the payoff of some class order binary options. This method take some advantages include valid for a wider class of models than Black-Schole’s; easy to extend any user defined options and mathematical representation formulae more simpler.
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