Deck 26: Exotic Options

Question 1

A binary option pays off $100 if a non-dividend-paying stock price is greater than its current value in three months.The risk-free rate is 3% and the volatility is 40%.Which of the following is its value?

A) 99.25N(-0.1375)
B) 99.25N(0.1375)
C) 99.25N(-0.0625)
D) 99.25N(0.0625)

Answer 1

99.25N(-0.0625)

Question 2

When can Bermudan options be exercised?

A) Any time during the life of the options
B) Any time after a certain date up to the end of the life of the life
C) Any time before a certain date or at the end of the option's life
D) On dates specified at the start of the option

Answer 2

D
Bermudan options can be exercised on specified dates but not all dates.(Bermuda is between Europe and America!)

Question 3

An Asian option is a term used to describe which of the following

A) An option where the payoff depends on whether a barrier is hit
B) An option where the payoff depends on the average value of a variable over a period of time
C) An option that trades on an exchange in the Far East
D) Any option with a nonstandard payoff

Answer 3

B
An Asian option is an option whose payoff is calculated from the average value of a variable over a period of time

Question 4

In a shout call option the strike price is $30.The holder shouts when the asset price is $40.What is the payoff from the option if the final asset price is $35?

A) $0
B) $5
C) $10
D) $15

Question 5

Which of the following describes a cliquet option

A) An option to exchange one asset for another
B) An instrument when the holder can choose between several alternative options
C) An option on an option with predetermined strike prices for the two options
D) A series of options with rules for determining strike prices

Question 6

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 7

A floating lookback call option pays off which of the following

A) The amount by which the final stock price exceeds the minimum stock price
B) The amount by which the maximum stock price exceeds the final stock price
C) The amount by which the strike price exceeds the minimum stock price
D) The amount by which the maximum stock price exceeds the strike price

Question 8

Which of the following is the payoff from an average strike put option?

A) The excess of the strike price over the average stock price, if positive
B) The excess of the final stock price over the average stock price, if positive
C) The excess of the average stock price over the strike price, if positive
D) The excess of the average stock price over the final stock price, if positive

Question 9

Which of the following is the payoff from an average strike call option?

A) The excess of the strike price over the average stock price, if positive
B) The excess of the final stock price over the average stock price, if positive
C) The excess of the average stock price over the strike price, if positive
D) The excess of the average stock price over the final stock price, if positive

Question 10

Static options replication for a portfolio of American options on a stock involves

A) Finding a hedge portfolio to match daily changes
B) Finding a hedge portfolio to match values on a boundary that is certain to be reached
C) Finding a hedge portfolio to match values at one particular time
D) Constructing a hedge taking both gamma and delta into account

Question 11

Which of the following is true

A) A variance swap is worth the square of a volatility swap
B) The payments on a variance swap are the square of the payments on a volatility swap
C) Variance swaps can be valued in terms of European call and put options.
D) None of the above

Question 12

Which of the following is equivalent to a long position in a European call option?

A) A short position in a cash-or-nothing put option plus a long position in an asset-or-nothing put option
B) A long position in an asset-or-nothing put option plus a long position in a cash-or-nothing put option
C) A long position in an asset-or-nothing call option plus a long position in a cash-or-nothing call option
D) A long position in an asset-or-nothing call option plus a short position in a cash-or-nothing call option

Question 13

An employer has promised that it will grant employees three year options in one year's time and that the options will be at the money at the time they are granted.What describes these options?

A) Chooser options
B) Forward start options
C) Compound options
D) Shout options

Question 14

Which of the following is equivalent to a short position in a European put option?

A) A short position in a cash-or-nothing put option plus a long position in an asset-or-nothing put option
B) A long position in an asset-or-nothing put option plus a long position in a cash-or-nothing put option
C) A long position in an asset-or-nothing call option plus a long position in a cash-or-nothing call option
D) A long position in an asset-or-nothing call option plus a short position in a cash-or-nothing call option

Question 15

A volatility swap is

A) An instrument that swaps the change in the value of a market variable for a fixed amount
B) A swap involving an asset whose volatility is greater than a certain level
C) An exchange of the implied volatility of an option at a future time for a fixed volatility
D) An exchange of the realized volatility of an asset for a fixed volatility

Question 16

As the barrier is observed more frequently,which of the following is true of a knock-out option

A) It becomes more valuable
B) It becomes less valuable
C) There is no effect on value
D) It may become more valuable or less valuable

Question 17

There are two types of regular options (calls and puts).How many types of barrier options are there?

A) Two
B) Four
C) Six
D) Eight

Question 18

A fixed lookback put option pays off which of the following

A) The amount by which the final stock price exceeds the minimum stock price
B) The amount by which the maximum stock price exceeds the final stock price
C) The amount by which the strike price exceeds the minimum stock price
D) The amount by which the maximum stock price exceeds the strike price

Question 19

There are two types of regular options (calls and puts).How many types of compound options are there?

A) Two
B) Four
C) Six
D) Eight

Question 20

Exotic options

A) Can always be hedged just as easily as regular options
B) Are easier to hedge than regular options
C) Are more difficult to hedge than regular options
D) Are sometimes easier and sometimes more difficult to hedge than regular options.