Napoleon options are OTC financial instrument that give the traders the opportunity to manage with the market volatility.
The payoff depends on the performance of a single stock or index, following this formula at each time t
max[ floor(t), cpn(t)+worst(t) ] it=1,2,...,n
where floor(t) is the minimum rate, cpn(t) is a coupon rate and worst(t) is a function defined as
worst(t) = min( Rj ) j=1,2,...,m
the worst j-th performance of the underlying (Rj) among m oservation in each period.
As you see, when the market volatility is small, the buyer of a napoleon option will have a good chance to get a payoff around the cpn. Otherwise, when the market volatility is large, the buyer will get at least the floor rate.
In the example we have a structured bond that pays a 4% coupn the first year and a Napoleon option payoff from second year to the end. The option underlying is the Euro Stoxx 50 index, "n" equals to 6 (years) and "m" equals to 12 (montly performance during an year).