Deck 23: Exotic Options: 2

Question 1

What is the characteristic that makes options,like quantos,multivariate options?

Answer 1

Any options that involve the interaction of two or more different assets are considered multivariate options.

Question 2

What is the risk a U.S.investor faces when investing in foreign index securities,besides index fluctuations?

Answer 2

Due to currency fluctuations,investors can lose money despite being correct about the movement of the index.

Question 3

A multivariate option that has a claim with a payoff determined by the average of two or more asset prices is known as:

A) Basket options
B) Multioptions
C) Quantos options
D) Rainbow options

Answer 3

A

Question 4

In a specific wager,Pat is paid $5.00 if the price of ABC Corp.is above $85.00.Currently,ABC Corp.price is $75.00,σ = 0.25,r = 0.04,div = 0 and the wager lasts 6 months.Pat is paid one share of ABC Corp.stock if the price is below $85.00.What is the value of her wager?

A) $21.80
B) $22.80
C) $23.80
D) $24.80

Question 5

The current Nikkei index price is 21,200.Assume σ = 0.13,r = 0.05 and div = 0.015.If ?K = 20,000 yen and yen per dollar spot rates are 103,what is the dollar value of a 2-year call?

A) $13.97
B) $18.97
C) $23.97
D) $28.97

Question 6

What purpose do currency linked options serve?

Question 7

Donald Trump offers to give you a partnership share in his casinos if the price of his shares drops below a certain level.He charges a nominal fee for this right.What is he offering you and is he wise?

Question 8

In a specific wager,Pat is paid $5.00 if the price of ABC Corp.is above $85.00.Currently,ABC Corp.price is $75.00,σ = 0.25,r = 0.04,div = 0 and the wager lasts 6 months.If the price is below $85.00,Pat must pay $5.00.What is the net value of Pat's wager?

A) -$2.49
B) +$2.49
C) -$1.50
D) +$1.50

Question 9

Suppose S = $52.50,K = $50,σ = 0.25,r = 0.04 and div = 0.01.What is the price of a gap option with 156 days until expiration and K₁ = $32.00?

A) $14.00
B) $15.00
C) $16.00
D) $17.00

Question 10

The concept created by Hakannson in 1976 to describe the exotic option like payoffs that could result without the need for a delta hedging requirement is known as:

A) Exotics
B) Multioptions
C) Quantos
D) Supershares

Question 11

Cyril is purchasing a down-and-in cash call.H = $45.00,S = $38.24,K = $35,σ = 0.33,?r = 0.05,div = 0 and it expires in 140 days.What is the value of the option if the payment is $1.00?

A) $0.80
B) $1.80
C) $2.80
D) $3.80

Question 12

The Buckingham Casino offers to give every gambler one share of Buckingham Casino Corp.stock if the price drops below $40.00,as an incentive to spur business.If S = $45.25,σ = 0.15,?r = 0.05 and div = 0,how much is this offer worth if it expires in 30 days?

A) $0.36
B) $0.26
C) $0.16
D) $0.06

Question 13

The Buckingham Casino offers to give every gambler one share of Buckingham Casino Corp.stock if the price drops below $40.00,as an incentive to spur business.If S = $45.25,σ = 0.15,?r = 0.05 and div = 0,how much profit or loss is Buckingham incurring if they charge $0.25 to participate in this wager?

A) $0.31 loss
B) $0.31 profit
C) $0.19 loss
D) $0.19 profit

Question 14

How does a quanto hedge the currency risk a U.S.investor encounters when investing in foreign indexes?

Question 15

Albert has accepted a wager to receive $5.00 if the price of Will Co.is above $35.00 per share.This right only exists if Will Co.drops below $33.00 sometime over the coming 100 days.Currently,Will Co.stock price is $38.24,r = 0.05,σ = 0.33,and div = 0.What is the value of Albert's position?

A) $0.35
B) $0.25
C) $0.15
D) $0.05

Question 16

A multivariate option that has a claim with a payoff dependent upon the price of two different assets is known as:

A) Exotics
B) Multioptions
C) Quantos
D) Supershares

Question 17

The Nikkei index is 22,550,K = 21,000,σ = 0.19,rf = 0.04,S = 0.10,r = 0.08 and ?div = 0.01.The yen to dollar spot rate is 104 and the correlation coefficient is 0.30.What would be the dollar price of a 2-year equity-linked foreign exchange call?

A) $45.02
B) $35.02
C) $25.01
D) $15.02

Question 18

Eugene holds a collect-on-delivery call with S = $36.50,K = $35,σ = 0.22,r = 0.04,div = 0 and 270 days until expiration.What is the value of the European COD call?

A) $5.90
B) $6.90
C) $7.90
D) $8.90

Question 19

In a specific wager,Pat is paid $5.00 if the price of ABC Corp.is above $85.00.Currently,ABC Corp.price is $75.00,σ = 0.25,r = 0.04,div = 0 and the wager lasts 6 months.Pat receives nothing if the price is below $85.00.What is the value of her wager?

A) $1.20
B) $2.20
C) $3.20
D) $4.20

Question 20

Ask students to define Exotic options.Ask students to give examples of Exotic options.Have students define their example in terms of basic calls on puts.Demonstrate how all Exotic options are merely modified versions of basic options.