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Greek of Exotic options

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Q1. Delta  of a Up-and-out Put ,Barrier = 125 ,strike=100 , when stock  price is 126 is ?

  A. 1   B -1   C 0.5  D 0

Q2. The Gamma of a Up-and-out Put ,Barrier=125, strike=100 is  maximum  when stock price is?

A. 125    B 100   C  150  D 20

Q3. Which one of the following portfolio  ≈ replicates the payoff of a Up and out Call ,Barrier = 120, Strike =100 ,given that vanila  call option  with strike= 100 is trading at $11.434 and another call option with Strike =120 is priced at 4.61?

A. long one call X=100 and short 1.866 unit of X=120 call

B. long one call X=100 and long one unit of X=120 call

C .Short 2 call of X=100 and long one Call X=120

D long 2 call x=100 and short 1.86 unit of X=120 call

Q4. The method used to replicate Exotic product is as in Q3 is called ?

A. dynamic replication using vanila option

B Static Replication using Vanila option

C. Static replication decomposes a vanila  option into a  portfolio of  Exotic options.

D.In  general,  a perfect static hedge requires an finite  number of standard options.

Q5. What is the  payoff of a long  gap put option  with trigger price =60 and strike price of 50 ,if at expiry stock price is 60?

A. 10          B. -10         C. 0   D .  120
asked Nov 6, 2017 by Concepts n Clarity (370 points)
edited Nov 6, 2017 by Concepts n Clarity

2 Answers

+1 vote
1) D

2) B

3) D

4) C

5) C
answered Nov 7, 2017 by Abhilashaa
+1 vote

Q1.D.  Delta  indicates what is the chance that stock will expire in the  money. as barrier is reached at 126 ., this option is not live  and delta is zero.

Q2. A.  gamma  is max at that point where drama is maximum  or chance or delta change is highest. below barrier  and above barrier delta abnormally changes so gamma is max at barrier

Q3. A  Barrier options  can be replicated  by series of calendar spread .but this question can be viewed by assuming stock price at expiry to be far above 120  between 100 and 120 then at far below 100. correct answer seems to be A. although with two vanila option we will never get a perfect hedge using static hedging.

Q4.B (its  a fact/theory)

Q5. B (I am offering you  a best formula which you will not  get anywhere even after long tiring google search.)  first we will forget the strike price and work with only trigger price . this option  is like a normal vanila option with strike price = Xt (trigger price) . now at expiry we will decide weather we want to   execute or  not like a normal option . if ST >= Xand option is call  our payoff will be   ST - Xt. . At this point just change Xwith strike price and calculate the payoff (-ve or positive)

In our case  Xt= 60 and Stock Price at expiry is 60 . so payoff   X t  -  Sand after replacing trigger price with strike price payoff = 50 -60  = -10

In Black Scholes formula N(d2) indicated what is chance that stock will expire in the money so in that formula we will put trigger price in place of X not strike price. because chance is decided by trigger price. while payoff is  only  decided by strike price.

thank you.

Sir please  go through this post and correct me if I am wrong..

answered Nov 7, 2017 by tumpa (220 points)
reshown Nov 14, 2017 by Concepts n Clarity