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Homework answers / question archive / Which ONE of the following statements on exotic options is INCORRECT? A
Which ONE of the following statements on exotic options is INCORRECT? A. As the barrier is observed more frequently, a knock-in option becomes more valuable and a knock-out option becomes less valuable , while keep everything else equal. 2 B. Exotic options trade over the counter. C. The payoff from an average strike put option is the excess of the average stock price over the final stock price, if positive. D. The payoffs from an lookback option depend on the average asset price during the life of the option. E. Compound option is an option on another option. Question 5 (5 points) Which ONE of the following statements is CORRECT? A. Employee stock options can be sold in the market B. To initiate an arbitrage trade if the forward/futures contract is overpriced, the trader should borrow at the risk-free rate, buy the asset, and sell the forward/futures. C. The feasible set of a portfolio with more than two risky assets is an area. D. CDS can be used to transfer volatility risks to a third party. E. Risk-averse investors have increasing marginal utility of wealth.
1. Option C is incorrect
The payoff on put option is the excess of strike price over the final stock price if positive.
2. Option D is correct
Credit default swaps (CDS) are the most common type of OTC credit derivatives and are often used to transfer credit exposure on fixed income products in order to hedge risk.
