Topic 4 mixes contracts that need extra state variables (Asians, lookbacks) with contracts that reduce to vanillas or bivariate normals (compounds, choosers, forward starts). Exam questions reward the same habits as Topics 2–3: state the payoff, write the PDE or reduction, name the bias direction for discrete monitoring, and pick a method with one sentence of justification. This note collects write-in-full templates for each family and one worked instance per template — the material an MFE examiner expects when the question says "set up the pricing problem" rather than "compute to four decimal places."
Learning objectives. By the end of this note you should be able to:
- write the Asian two-factor PDE and the floating-strike reduction BVP from memory;
- classify lookback payoffs and state discrete-extrema bias signs;
- apply the Rubinstein chooser and ATM forward-start formulas in template form;
- complete a method-selection table for a given exotic confirmation.
In this lesson
- 5.1 Template: Asian PDE setup
- 5.2 Template: floating-strike Asian reduction
- 5.3 Template: lookback payoff identification
- 5.4 Template: discrete extrema bias
- 5.5 Template: simple chooser
- 5.6 Template: compound option timeline
- 5.7 Template: ATM forward-start call
- 5.8 Method-selection checklist
- 5.9 Worked exam: combined identification
Before you start
- Asian Options — Averaging and the Pricing PDE
- Lookback Options — Extrema Payoffs and Reflection
- Compound, Chooser, and Forward-Start Options
The full lesson, with worked examples and exercise solutions, is for members.
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