FRM Part I · FRM Exam Part I · Exotic Options
A portfolio manager considers four exotic options, each on the same underlying, with the same strike and maturity. Which of the following options has a payoff that does NOT depend on the path of the underlying price before maturity?
The gap option is path independent. Its payoff depends only on the underlying price at maturity, relative to a trigger price and a strike. The barrier, lookback and Asian options all depend on prices observed along the path before maturity.
- AGap optionCorrect
- BUp-and-out put option
- CFloating-strike lookback call
- DArithmetic Asian call
Explanation
A gap option has a trigger price that determines whether a payoff occurs and a strike that determines its size, both applied to the terminal price only, so it is path independent. The up-and-out put depends on whether a barrier was touched. The lookback depends on the minimum price reached. The Asian depends on the average. These three are path dependent.
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