An Up-And-Out Put May Be Preferred to a Vanilla Put

question 19

Multiple Choice

An up-and-out put may be preferred to a vanilla put

• A)Because it results in higher payoffs in all circumstances.
• B)Because it sometimes pays off even when the stock price rises whereas the vanilla only pays off when the stock price falls.
• C)By an Investor with strong directional views because it is a cheaper form of taking on a directional bet.
• D)By an investor more concerned with direction than volatility because the down-and-out put always reacts negatively to volatility unlike the vanilla put.

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Definitions:

Investment Account Balance

The total value of all the securities and cash in an investment account at any given time, reflecting purchases, sales, gains, and losses.

Equity Method

This approach adjusts the value of an investment based on the proportional changes in the investee's net assets, reflecting the investor's ownership interest.

Goodwill

An intangible asset that arises when a business is acquired for more than the fair value of its net identifiable assets, representing the value of the brand, customer base, and other non-tangible assets.

Equipment Account

An account used in bookkeeping to track the purchase and depreciation of equipment over time.