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Answer: Trader A's payoff is $15.
## Explanation Let's analyze both types of lookback options: ### Floating Lookback Call Option (Trader A) - The strike price is set at the **minimum stock price** during the option's life - Payoff = Max(0, Final Price - Minimum Price) - Minimum price = $35 - Final price = $50 - Payoff = Max(0, $50 - $35) = $15 ### Fixed Lookback Call Option (Trader B) - The strike price is **fixed** at the beginning ($40) - Payoff = Max(0, Maximum Price - Strike Price) - Maximum price = $55 - Strike price = $40 - Payoff = Max(0, $55 - $40) = $15 Therefore: - **Trader A's payoff is $15** (Option A is correct) - **Trader B's payoff is $15** (Option D is also correct) However, since the question asks "Which of the following statements is correct?" and typically expects one answer, Option A is the most straightforward correct statement about Trader A's payoff.
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Trader A purchased a 3-month floating lookback call option on ABA stock three months ago. Trader B purchased a 3-month fixed lookback call option on the same stock during the same time period as Trader A. ABA stock finished at $50 at the end of the three-month option term, and the initial strike price was equal to $40. The minimum stock price during the life of the option was $35, and the maximum stock price was $55. Which of the following statements is correct?
A
Trader A's payoff is $15.
B
Trader B's payoff is $10.
C
Trader A's payoff is $20.
D
Trader B's payoff is $15.
E
Trader A's payoff is $10.
F
Trader B's payoff is $5.