Explanation:
Asian options are options where the payoff depends on the arithmetic average of the price of the underlying asset during the life of the option.
Option A is incorrect. A gap option is a type of binary option whose stated strike price is different from its payoff strike.
Option B is incorrect. A lookback option is an exotic option that allows investors to “look back” at the underlying prices occurring over the life of the option and then exercise based on the underlying asset’s optimal value.
Option D is incorrect. A compound option or split-fee option is an option on an option. The exercise payoff of a compound option involves the value of another option. A compound option then has two expiration dates and two strike prices.
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Q.2 An exotic option where the payoff of the option is not based on the price of the underlying at the end of the contract, but on the arithmetic average of the prices during the life of the option is most likely called a/an:
A
Gap option
B
Lookback option
C
Asian option
D
Compound option
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