Other type of options Flashcards
Why is an asian option cheaper than the regular option.
Because the average stock price has less volatility than a single stock price.
What is the effect on the price of an Asian option if the number of prices used in the average increases?
Price should decrease.
What are the implication of G(S) < A(S) on the payoffs of puts and calls?
G(S) price call < A(S) price call
G(S) strike call > A(S) strike call
G(S) price put > A(S) price put
G(S) strike put < A(S) strike put
Can you use an binomial tree to find the value of an asian option? If so, explain how ?
Path dependent : won’t recombine
Need to find the average payoff at the end using the risk neutral probability and discount the average payoff to T=0.
What are the 3 types of barrier option? Describe them.
Knock-in : gets activated when the barrier is reached
Knock-out : gets deactivated when the barrier is reached
Rebate : pays a fixed amount when the barrier is reached
What are the 2 options of payoff for a put option if S0>Barrier>K ? (D&I / D&O)
D&I : Payoff barrier = payoff regular
D&O : option is worthless.
What are the 2 options of payoff for a call option if S0
U&I : Payoff barrier = payoff regular
U&O : option is worthless.
What is the effect on the value of the call option when the barrier becomes higher ?
Value of call decreases
What is the effect on the value of the put option when the barrier becomes lower ?
Value of put decreases
What are two special characteristics regarding the payoff of a Gap option ?
Payoff is NOT optional and CAN be negative.
Is the gap option path dependent?
No, depends only on the stock price at expiration.
What is the particularity regarding the functions of the strike price of a gap option?
Function of the strike price is separated : K1 for the payoff and K2 as the trigger.
How do you apply the BS formula to a gap option?
Call = So(e^(-dt))N(d1) - K1(e^(-rt))N(d2)
d1 uses K2.
