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Answer: d) Put on K - MAX(S, Q, C, K)
Standard rainbow option payoffs are based on either the **maximum** or **minimum** of the underlying asset set. - **A** is a standard rainbow call payoff: \(\max(0, \max(S,Q,C)-K)\). - **B** is equivalent to A, since \(\max(S,Q,C,K)-K = \max(0,\max(S,Q,C)-K)\). - **C** is a standard rainbow put payoff: \(\max(0, K-\min(S,Q,C))\). - **D** is not a standard rainbow payoff, because \(K-\max(S,Q,C,K)\) is not the usual nonnegative option payoff structure based on the minimum asset. Thus, the exception is **D**.
Author: Manit Arora
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Question 21.2. Assume S = S&P Index, Q = Nikkei index, C = cash return and K = the strike price. Each of the following gives the payoff for a RAINBOW option EXCEPT FOR:
A
a) Call on MAX[0, MAX(S, Q, C) - K]
B
b) Call on MAX[S, Q, C, K] – K
C
c) Put on MAX[0, K - MIN(S, Q, C)]
D
d) Put on K - MAX(S, Q, C, K)
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