A cliquet option or ratchet option is an

exotic option In finance, an exotic option is an option which has features making it more complex than commonly traded vanilla options. Like the more general exotic derivatives they may have several triggers relating to determination of payoff. An exotic opt ...

consisting of a series of consecutive

forward start option In finance, a forward start option is an option that starts at a specified future date with an expiration date set further in the future. A forward start option starts at a specified date in the future; however, the premium is paid in advance, a ...

s. The first is active immediately. The second becomes active when the first expires, etc. Each option is struck

at-the-money In finance, moneyness is the relative position of the current price (or future price) of an underlying asset (e.g., a stock) with respect to the strike price of a derivative, most commonly a call option or a put option. Moneyness is firstly a thr ...

when it becomes active. 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 In finance, the strike price (or exercise price) of an option is a fixed price at which the owner of the option can buy (in the case of a call), or sell (in the case of a put), the underlying security or commodity. The strike price may be set b ...

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.

References

Options (finance) {{econ-stub