FRM Part I · FRM Exam Part I · Exotic Options
A gap call option has a trigger price of 50 and a payoff strike of 46. At expiry the underlying asset price is 52. What is the payoff to the holder?
The payoff is 6. The price of 52 is above the trigger of 50, so the option pays, and the amount is the asset price minus the payoff strike of 46. The trigger only decides whether the option pays; it does not set the amount paid.
- A6Correct
- B2
- C0
- D4
Explanation
A gap call pays S_T minus the payoff strike if S_T exceeds the trigger. The trigger of 50 is exceeded by 52, so the payoff is 52 - 46 = 6. Using the trigger as the strike gives 2, which is wrong. The gap between the two strikes (4) is not the payoff either.
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