Explanation:

For a gap put, the payoff is similar to a standard put, but it is activated only if the trigger condition is met.

If $K1 = K2$ , the gap put becomes the same as the vanilla put, so A is true.
If $K2 > K1$ , the payoff can be negative in some states, so the option value can be lower and may even be negative in theory; thus B is not the false statement in this context.
If $K2 < K1$ , the option is exercised less often than a vanilla put, so its price must be less than the vanilla put price of $0.740, not greater. Therefore C is false.
The highest value occurs when the trigger equals the strike, which makes the contract equivalent to the vanilla put, so D is true.

Correct answer: C

Q-729.1 Consider an asset with a current price of `$120.00` and volatility of 16.0% while the risk-free rate is 3.0%. A regular (aka, vanilla) but deeply out-of-the-money (OTM) one-year European put option on the stock with a strike price of `$100.00` has a price of `$0.74`0; i.e., $p(S = \`$ 120.00`, K = \` $100.00`, \sigma = 0.160, Rf = 0.030, T = 1.0\text{ year}) = \`$ 0.74`0$.

Now consider the modification of this regular put option into a gap put option with the addition of a trigger price, denoted K2. In this case, the price of the gap put option is given by $p(S = \`$ 120.00`, K1 = \` $100.00`, K2 = \text{trigger price}, \sigma = 0.160, Rf = 0.030, T = 1.0\text{ year})$ .

Each of the following statements about this gap option is true EXCEPT which is false?

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MManit

Last updated: April 18, 2026 at 11:32

If $K1 = K2 = \`$ 100.00$, then the gap option also has a price of $0.74`0

28.6%

If the strike price, $K1 = \`$ 100.00$ and the trigger price, $K2 = \ $110.00`$ , then the gap option has a negative price

42.9%

If the strike price, $K1 = \`$ 100.00$ and the trigger price, $K2 = \ $90.00`$ , then the gap option price is greater than $0.740

14.3%

Given a strike price, $K1 = 100.00$ , among various trigger prices, the gap option has its highest price when the trigger, $K2 = \`$ 100.00`$

14.3%

Financial Risk Manager Part 1