Exotic Options: Pricing

In attempting to price exotic options, the Black-Scholes methodology fails for a number of reasons, which we explore here. A number of alternative numerical procedures are used instead, including the finite difference method, and Monte Carlo simulation. The issue of the multi-dimensionality of exotic options is also discussed, as well as problems which arise when trading with exotics, managing the risks associated with exotics, or trying to hedge exotics.