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Exam 14: Exotic Options: I

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Question 1

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

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When the barrier price exceeds...

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Question 2

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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

E) A) and B)
F) All of the above

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Question 3

Multiple Choice

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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?

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?

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?

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?

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?

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?

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?

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?

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

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.

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?

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?

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?

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

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.

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.

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?

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?