FRM Part I · FRM Exam Part I · Exotic Options
A gap call option has a trigger price of 50 and a strike price of 45. The payoff is S_T minus the strike if S_T is above the trigger, and zero otherwise. At expiry the asset price is 52. What is the payoff to the holder?
The payoff is 7. The asset price of 52 is above the trigger of 50, so the option pays, and the amount is the asset price minus the strike of 45, not minus the trigger.
- A7Correct
- B2
- C0
- D5
Explanation
Because 52 exceeds the trigger of 50, the option pays. The payoff is S_T minus the strike: 52 - 45 = 7. A payoff of 2 wrongly subtracts the trigger. A payoff of 5 uses trigger minus strike. A payoff of 0 ignores that the trigger has been breached.
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