cliquet option
{{Short description|Technique in derivatives trading}}
A cliquet option or ratchet option is an exotic option consisting of a series of consecutive forward start options.{{cite web|url=http://www.global-derivatives.com/index.php/pricing-models-topmenu-37/24?task=view|title=global-derivatives.com|website=www.Global-Derivatives.com|access-date=24 September 2017}} 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.{{cite web|url=http://www.riskglossary.com/link/forward_start_option.htm|title=Riskglossary.com|website=RiskGlossary.com|access-date=24 September 2017}}
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.http://docs.fincad.com/support/developerFunc/mathref/cliquet.htm FiNCAD - Cliquet options]
Example
A three-year cliquet with reset dates each year would have three payoffs.
- The first would pay off 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 one-year option, but with the strike price equal to the stock price at the end of the first year.
- The third year's payoff has the same payoff as a one-year option, but with the strike price equal to the stock price at the end of the second year.