Deck 14: Exotic Options: I

Question 1

Assume S = $52,K = 50,div = 0.01,r = 0.06,σ = 0.22,and 45 days until expiration.What is the premium on an Asian average strike call where N = 1?

A) $0.00
B) $0.10
C) $0.20
D) $0.30

Answer 1

A

Question 2

Assume S = $31.75,div = 0,r = 0.03,and σ = 0.20,and 90 days until the expiration of a standard call option.A call on call compound option with an exercise price of $2.00 has 180 days until expiration.What is the premium of the call on call option?

A) $1.46
B) $2.46
C) $3.04
D) $3.53

Answer 2

A

Question 3

Assume S = $60,K = $60,r = 0.07,σ = 0.24,div = 0.02,and 90 days until expiration.What is the premium on an Asian average price put where N = 4?

A) $1.74
B) $1.84
C) $1.94
D) $2.04

Answer 3

A

Question 4

The underlying stock for a European exchange option has S = $27.15,div = 2.0%,and ?σ = 0.18.The strike stock has S = $30.00,div = 0.0%,and σ = 0.22.The two stocks have a correlation coefficient of 0.73.If the exchange option expires in 2 years,what is the price of the call using a Black-Scholes approach?

A) $0.88
B) $0.98
C) $1.09
D) $1.19

Question 5

Assume S = $31.75,div = 0,r = 0.03,and σ = 0.20,and 90 days until the expiration of a standard call option.A put on call compound option with an exercise price of $2.00 has 180 days until expiration.What is the premium of the put on call option?

A) $0.42
B) $0.48
C) $0.85
D) $1.11

Question 6

Assume S = $66,K = 65,div = 0,r = 0.04,σ = 0.25,and 60 days until expiration.What is the premium on a knock-out call option with a down-and-out barrier of $60?

A) $2.40
B) $2.70
C) $3.00
D) $3.30

Question 7

Assume S = $36,K = 35,div = 0.0,r = 0.08,σ = 0.40,and 270 days until expiration.What is the premium on an Asian average strike call where N = 2?

A) $1.91
B) $2.01
C) $2.11
D) $2.21

Question 8

Why might a down-and-in put option be more attractive than a standard option when hedging a foreign currency position?

Question 9

When hedging a foreign currency position,what makes a down-and-out put unattractive?

Question 10

The value of an Asian put option is computed using the geometric average strike.What is the expected payoff if the observed prices to date are 71,72,70,68,69,and 68,respectively?

A) 1.35
B) 1.45
C) 1.55
D) 1.65

Question 11

Assume S = $51,K = $50,div = 0.0,r = 0.05,σ = 0.20,and 55 days until expiration.What is the premium on a knock-in call option with a down-and-in barrier of $48?

A) $0.175
B) $0.185
C) $0.195
D) $0.205

Question 12

Assume S = $53,K = 50,div = 0,r = 0.03,σ = 0.30,and 100 days until expiration.What is the premium on a knock-in put option with an up-and-in barrier of $55?

A) $0.63
B) $0.73
C) $0.83
D) $0.93

Question 13

Assume S = $46,K = 45,div = 0,r = 0.03,σ = 0.20,and 50 days until expiration.What is the premium on a knock-out put option with an up-and-out barrier of $50?

A) $0.83
B) $0.93
C) $1.13
D) $1.33

Question 14

Assume S = $42,K = 45,div = 0,r = 0.04,σ = 0.48,and 80 days until expiration.What is the premium on a knock-out put option with a down-and-out barrier of $44?

A) $2.13
B) $3.13
C) $3.47
D) $4.07

Question 15

Assume S = $63,K = 60,div = 0,r = 0.04,σ = 0.35,and 90 days until expiration.What is the premium on a knock-in call option with an up-and-in barrier of $65?

A) $1.96
B) $2.06
C) $2.16
D) $2.26

Question 16

The value of an Asian call option is computed using the geometric average strike.What is the expected payoff if the observed prices to date are 69,70,72,71,75,and 73,respectively?

A) 1.26
B) 1.36
C) 1.46
D) 1.56

Question 17

What is the payoff on a 75 strike Asian option given it is a geometric average price call? The recent prices are 72,76,74,78,and 78.

A) 0.46
B) 0.56
C) 0.66
D) 0.76

Question 18

What is the payoff on a 90 strike Asian option given it is a geometric average price put? The recent prices are 89,90,91,87,87,and 88.

A) 1.25
B) 1.35
C) 1.45
D) 1.55

Question 19

Assume S = $55,K = $55,r = 0.07,σ = 0.27,div = 0.0,and 180 days until expiration.What is the premium on an Asian average price call,where N = 5?

A) $2.89
B) $2.99
C) $3.09
D) $3.19

Question 20

Assume S = $43,K = 45,div = 0.0,r = 0.09,σ = 0.36,and 90 days until expiration.What is the premium on an Asian average strike put where N = 3?

A) $0.26
B) $0.36
C) $0.46
D) $0.56

Question 21

For a long put position,what benefit is provided by a gap option should prices rise?

Question 22

What is the primary difference between a standard option and an exchange option?

Question 23

Why are exotic options not so exotic? Ask the class to explain why an option described as exotic is merely a standard option with different terms.Ask students to create exotic options that are different than the text examples.

Question 24

Why is the premium on a standard option and down-and-in call the same when the barrier price exceeds the stock price?