Consider the Following Exotic Option Whose Payoff at Maturity Is $\surd$

question 4

Multiple Choice

Consider the following exotic option whose payoff at maturity is given by the square root of the stock price less the strike price if it has a positive value,zero otherwise,that is: max[ $\surd$ S(2) - K,0].
Using the above data except for assuming a new strike price is $5,today's arbitrage-free price of this exotic option is:

• A) $0.21
• B) $0.29
• C) $0.36
• D) $0.70
• E) None of these answers are correct.

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Definitions:

Standard Deviation

Standard deviation is a measure of the amount of variation or dispersion of a set of values, indicating how much the values in the set differ from the mean.

Random Samples

A sample from a population that is chosen in such a way that every member of the population has an equal chance of being selected.

Standard Error

The standard deviation of the sampling distribution of a statistic, particularly mean, indicating the variability of an estimate from sample to sample.

Positively Skewed

A description of a distribution of data in which the tail on the right side of the histogram is longer than the left side, indicating that most values are clustered on the left.