Question

An exotic option, with exercise price of £8.50, was written on a stock whose price at opening of the contract was £9. When the option expired the stock price was £7. The stock price fell below the value of £6.50 during the option’s life and the option paid off £1.50 at maturity. Which of the following best describes the option?

1. Down-and-in-put

2. Up-and-input

3. Down-and-outcall

4. Gapput

Answer 1

Down-and-in put option allows an Investor to benefit when a price is falling.

In the give case exercise price of £8.50

When the option expired the stock price was £7.

In case of Put option , Option holder gets pay off only when stock price falls below the strike price on the expiry day of option. In the given case, Strike price was £8.50 and on the expiry day stock price was £7. So that, on expiry day holder of the put option got £1.50 pay off. It is clearly evidencing that holder has exercised the option and it is relating to Down-and-in put option.

Down and Out call option also known as barrier option.These options define the payout conditions based on whether the price falls enough from the strike price to reach a designated barrier price. In the given case designated barrier price is not mentioned. so it is not related to Down and Out call option.

Gap option means whose stated strike price is different from its payoff strike. In the given case strike price is not changed. Strike price on the payoff date is not changed. So, given case is not related to Gapput.