A cliquet option or also called ratchet option is name given to an exotic option consisting of a series of consecutive forward start options. The first is active on immediate basis.While the second one becomes active when the first expires, etc. Each option is struck at-the-money when it becomes active.

So we can say that a cliquet is, therefore, a series of at-the-money options but here the total premium is determined in advance. One can consider  a cliquet  as a series of “pre-purchased” at-the-money options. There are two possibilities that the payout on each option can either be paid at the final maturity, or it can be paid at the end of each reset period.

Example

A three year cliquet having reset dates each year would be having three payoffs. The first of the two would be to payoff at the end of the first year and it has the same payoff as a normal ATM option.

The second year’s payoff has the same payoff having a two year option, but having the strike equal to the stock price at the end of the first year.

The third year’s payoff has the same payoff as a three year option, but having the strike equal to the stock price at the end of the second year.

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