FRM Part I · FRM Exam Part I · Exotic Options
An average price Asian call on a stock has a strike of 50. The stock price is observed at four quarterly dates, with prices of 48, 52, 56 and 60. The payoff is based on the arithmetic average of these four observations. What is the payoff at maturity?
The payoff is 4. The arithmetic average of the four observed prices is 54, and the average price call pays the average minus the strike of 50, giving 4. Using the final price of 60 would wrongly give 10.
- A10
- B3Correct
- C4
- D5
Explanation
Average = (48+52+56+60)/4 = 216/4 = 54. Payoff = max(54-50, 0) = 4. Option 10 uses the final price minus strike (60-50). Option 3 is the wrong-base error of using 53. Option 5 would come from an incorrect average of 55.
Did you get it right without looking?
One question tells you little. A timed set on Exotic Options shows your real accuracy, how long you take and where you lose marks.
More Exotic Options questions
- A corporate treasurer with a foreign currency payable wants cheaper protection than a vanilla call and accepts losing the protection if the …
- A risk manager hedges a short position in a down-and-out call using a static portfolio. The barrier is at 90, spot is 100, and the hedge por…
- A digital (cash-or-nothing) call on an index pays 1,000,000 USD at expiry if the index is above 4,500 and zero otherwise. At expiry the inde…
- A cash-or-nothing call option pays USD 50 if the underlying asset price is above the strike at expiry and nothing otherwise. Under risk-neut…
- Which statement correctly distinguishes a path-dependent exotic option from a non-path-dependent one?
- Compared with an otherwise identical standard European call option, an arithmetic-average-price Asian call option on the same underlying and…