Which of the following is true of a gap option
A) The strike price determining whether a payoff is made is not the same as the strike price determining the size of the payoff
B) There is a straightforward valuation formula similar to Black-Scholes-Merton
C) It describes an option where there is a cost to exercising
D) All of the above

Question

Quizplus · Accepted Answer

All of A,B,and C are true.A gap call option provides a payoff of S_T- K₁ when S_T>K₂.A gap put option provides a payoff of K₁-S_T when S_T2

Which of the Following Is True of a Gap Option