19) Exotic Options Flashcards

1
Q

Why might exotic options present an opportunity to make money

A
  • Attract new business
  • Insert clauses to our advantage
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2
Q

What are some examples of exotic options

A
  • Asian – exercise price based on the average share price over a given time interval
  • Lookback – exercise price based on the maximum/minimum over a given time interval
  • Bermudan – can be exercised on particular dates only
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3
Q

What is an Asian Option

A

A contract giving the holder the right to buy or sell an underlying asset (e.g. a share) for its average price over a prescribed time interval

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4
Q

What is the average of the share price S over the time interval [0, T]

A
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5
Q

What is a floating strike asian option

A

Uses the share price S as the underlying asset and the average share price A(T) as the exercise price

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6
Q

What is the payoff of a floating strike asian option

A
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7
Q

What is the payoff of a fixed strike asian option

A
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8
Q

How is the Black-Scholes model adapted to handle Asian options using the integral of the stock price

A
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9
Q

How is the modified Black-Scholes equation for an Asian option derived using an adapted version of Itô’s Lemma

A
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