FRM Part I · FRM Exam Part I · Exotic Options
An average price Asian call has a strike of 100 and the average is computed from four quarterly observations of the stock: 96, 104, 112 and 108. What is the payoff at maturity (arithmetic average)?
The payoff is 5, since the arithmetic average of the four prices is 105 and the strike is 100, giving max(105-100, 0). None of the listed options equals this value, so the question is invalid as written.
- A8Correct
- B6
- C0
- D12
Explanation
The arithmetic average is (96+104+112+108)/4 = 420/4 = 105. The payoff is max(105-100, 0) = 5. Checking the sum: 96+104=200 and 112+108=220, giving 420, so the average is 105 and the payoff is 5.
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