AIM 2: List and describe how various option characteristics can transform standard American options into nonstandard American options.

1、A Bermudan option is one where the:

A) strike price is changed to one-half the initial stock price.
 
B) exercise is restricted to certain dates.
 
C) volatility is assumed to increase by.
 
D) strike price is chosen to be the average between the maximum and minimum stock price over the life of the option.

The correct answer is B

Bermudan options are options that restrict exercise to certain dates, not anytime over the life of the option.

2、A call option where early exercise is restricted to certain dates is an example of a(n):

A) Bermudan option. 
 
B) lookback option. 
 
C) chooser option.
 
D) Asian option.

The correct answer is A

A Bermudan option is an option in which early exercise is restricted to certain dates.

AIM 3: List and describe the characteristics and pay-off structure of forward start options, compound options, chooser and barrier options, binary options, lookback options, shout options, Asian options, and basket options.

1、Which of the following describes a compound option?

A) Selling a call and put at the same strike price.
 
B) Buying a call and put at the same strike price.
 
C) Selling a forward contract on a put option.
 
D) Buying a call option on another call option.

The correct answer is D

Compound options are options on other options. Buying a call option on another call option allows the owner to determine whether he wishes to exercise the first option to own the second.

2、A chooser option allows the owner to:

A) choose the option’s strike price.
 
B) pay the minimum price over a period chosen by the owner.
 
C) choose whether the option is a call or a put at a specified period of time.
 
D) receive the intrinsic value either at expiration or at a time chosen by the owner. 

The correct answer is C

Chooser options allow the owner to choose whether the option is a call or a put.

3、A shout option allows the owner to:

A) pay the average price over the option period from shout time.
 
B) choose whether the option is a call or a put at shout time.
 
C) receive either the intrinsic value at shout time or at expiration.
 
D) cancel the option if it falls below a specified price barrier.

The correct answer is C

Shout options allow the owner to shout to the writer one time during the life of the option. At expiration, the owner will receive either the intrinsic value at shout time, or at expiration, whichever is greater.

4、A shout option allows the owner to:

A) receive the greater of the intrinsic value at shout time or the intrinsic value at expiration. 
 
B) pay the average price over the option period from shout time. 
 
C) choose whether the option is a call or a put at shout time.
 
D) cancel the option if it falls below a specified price barrier.

The correct answer is A

Shout options allow the owner to shout to the writer one time during the life of the option. At expiration, the owner will receive the intrinsic value at either shout time or expiration, whichever is greater.

5、An option wherein the payoff is based on the highest or lowest price experienced over some period of time, whichever is most advantageous to the option holder, is called what?

A) An outside barrier option.
 
B) A rainbow option.
 
C) A fixed-quanto option.
 
D) A lookback option.

The correct answer is D

An option wherein the payoff is based on the highest or lowest price experienced over some period of time, whichever is most advantageous to the option holder, is called a lookback option.

6、A down-and-out call option is an option that:

A) comes into existence when the underlying asset price falls to a designated barrier price.
 
B) comes into existence when the underlying asset price rises to a designated barrier price.
 
C) ceases to exist when the underlying asset price rises to a designated barrier price.
 
D) ceases to exist when the underlying asset price falls to a designated barrier price.

The correct answer is D

This is the definition of a down-and-out call. “Out” signifies that the option ceases to exist when the price moves “down” to a specified barrier.

7、A down-and-in call option is an option that:

A) comes into existence when the underlying asset price rises to a designated barrier price.
 
B) ceases to exist when the underlying asset price falls to a designated barrier price.
 
C) comes into existence when the underlying asset price falls to a designated barrier price.
 
D) ceases to exist when the underlying asset price rises to a designated barrier price.

The correct answer is C

This is the definition of a down-and-in call: “in” signifies that the option comes into existence when the price moves “down” to a specified barrier.

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