Explanation:
The correct answer is A.
A gap option is characterized by two strike prices: X1 and X2, where X2 > X1. The payoff of a gap call option depends on whether the final stock price exceeds the trigger price X2, not X1. When the stock price is greater than X2 (S > X2), the option becomes active and the payoff is calculated using X1 as the reference strike, resulting in a payoff of S – X1. This is what distinguishes a gap option from a regular European call option, which uses a single strike price.
Q.789 A gap option is a non-standard option that is created with a European call option. However, the European call option used in the construction of a gap option is different from the regular European call option. Which of the following is the accurate difference between a gap European call option and a regular call option?
A
A gap option has two strike prices i.e. X1 and X2 (where X2 > X1). When the final stock price is greater than X2 (S > X2), the payoff of the gap call option is S – X1.
B
A gap option has two strike prices i.e. X1 and X2 (where X2 > X1). When the final stock price is greater than X2 (S > X2), the payoff of the gap call option is S – X2.
C
A gap option has two strike prices i.e. X1 and X2 (where X2 > X1). When the final stock price is greater than X1 (S > X1), the payoff of the gap call option is S – X1.
D
A gap option has two strike prices i.e. X1 and X2 (where X2 > X1). When the final stock price is greater than X1 (S > X1), the payoff of the gap call option is S – X2.
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