FRM Part I · FRM Exam Part I · Exotic Options
An investor buys a European option that gives the right to buy a stock at expiry at the lowest price observed during the option's life. This option is best classified as which type?
This is a floating lookback call. Its payoff equals the final stock price minus the minimum price during the option's life, which is equivalent to buying at the lowest observed price. Asian, gap and barrier options are defined by averages, trigger prices or barrier levels instead.
- AFloating lookback callCorrect
- BFixed-strike Asian put
- CGap call option
- DUp-and-in barrier call
Explanation
A floating lookback call pays the terminal price minus the minimum price over the life, equivalent to buying at the lowest price. Asian options use averages, gap options use a separate trigger and payoff strike, and barrier options depend on touching a level.
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