Exotic Derivatives

Exotic Derivatives Meaning:
In financial derivatives terminology, the term Exotic Derivatives usually refers to more complex, unusual and specific derivative contracts that depend on the value of some underlying asset or defined set of assets. This term contrasts with the use of Vanilla Derivatives to denote more standard derivative contracts.

For example, Exotic Derivatives that fall into the options category would generally include the following exotic option types: Knock Out Options, Knock In Options, Average Rate Options, Average Strike Options, Binary Options and Basket Options. In some cases, Exotic Derivatives will have discontinuous payoff profiles, as with Knock Out and Knock In Options. In other cases, they might depend on the value of more than one underlying asset, like with Basket Options. Still other types of Exotic Options have an averaging process applied to either their strike price or to their underlying, as with Average Strike or Average Rate Options.