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Answer: d) Box spread
A rainbow option is characterized by a payoff that depends on the best or worst outcome among multiple underlyings (for example, the maximum or minimum of several asset prices). - **A** is a classic rainbow-style payoff because it depends on the maximum of multiple assets. - **B** is similar because U.S. Treasury bond futures embed a **cheapest-to-deliver** style optionality across multiple deliverable bonds. - **C** is similar because a CDS with multiple deliverable obligations also involves choosing among multiple deliverables. - **D** is the exception: a **box spread** is a synthetic position formed from options and is not a rainbow-style payoff on multiple underlyings. Therefore, the correct answer is **D**.
Author: Manit Arora
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Question 21.1. Each of the following is SIMILAR to a RAINBOW option EXCEPT for:
A
a) Option with payoff = MAX[Asset #1, Asset #2, Asset #3]
B
b) US Treasury bond futures contract
C
c) Credit default swap (CDS) with multiple deliverable obligations
D
d) Box spread
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