FRM Part I · FRM Exam Part I · Options Markets
A cash-or-nothing digital call pays USD 100 if the stock finishes above USD 80 at expiry. A bull call spread is used to approximate it: long a call at strike 79 and short a call at strike 81, scaled to approximate the digital. How many units of the spread are needed to approximate the USD 100 payoff?
You need 50 units. Each bull call spread from 79 to 81 has a maximum payoff of USD 2, so replicating a USD 100 digital payoff requires 100 divided by 2, which is 50 spreads.
- A50 unitsCorrect
- B100 units
- C200 units
- D25 units
Explanation
Each spread has maximum payoff 81 - 79 = 2 when the stock is above 81. To approximate a payoff of 100 you need 100/2 = 50 units. 100 units would ignore the spread width.
Did you get it right without looking?
One question tells you little. A timed set on Options Markets shows your real accuracy, how long you take and where you lose marks.
More Options Markets questions
- An investor buys a European put on a non-dividend stock with strike $45 for a premium of $2.50. At expiry the stock price is $41. What is th…
- A stock trades at USD 100. An investor holds the stock and buys a European put with strike USD 95 for USD 2.00, financed by selling a Europe…
- An investor owns 100 shares of a stock trading at $50 and writes one call option contract on 100 shares with a strike of $55, receiving a pr…
- A trader writes one European put option on a stock with a strike of USD 80, receiving a premium of USD 4.50. At expiration the stock price i…
- A European put on a non-dividend-paying stock has strike USD 60, one year to expiry, and the stock trades at USD 52. The continuously compou…
- A stock trades at $80. A trader sells a 3-month $80 call for $5 and buys a 6-month $80 call for $8 (a calendar spread). Which statement abou…