Cliquet option explained

A cliquet option or ratchet option is an exotic option consisting of a series of consecutive forward start options.^[1] 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.^[2]

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.^[3]

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.

Notes and References

1. Web site: global-derivatives.com. www.Global-Derivatives.com. 24 September 2017.
2. Web site: Riskglossary.com. RiskGlossary.com. 24 September 2017.
3. http://docs.fincad.com/support/developerFunc/mathref/cliquet.htm FiNCAD - Cliquet options