FRM Book 3 Chapter 15 UPDATED
ACTUAL Exam Questions and CORRECT
Answers
What is a Bermudan option - CORRECT ANSWER - A Bermudan option is an option that
can be exercised only at certain pre-specified discrete times.
Explain how a futures-style option works - CORRECT ANSWER - A futures-style option
is a futures contract on the option's payoff. The final settlement of the futures contract equals this
payoff.
What is a gap option? - CORRECT ANSWER - A gap option is a European call or put
option where the trigger determining whether there will be a payoff is different from the strike
price used to calculate the payoff
Explain how (a) a chooser option and (b) a forward-start option work - CORRECT
ANSWER - A chooser option is an option with a certain strike price and time to maturity
where at some stage during the option's life the holder will choose whether it is a call or a put. A
forward start option is an option that will come into existence at some future time.
List four types of compound options. - CORRECT ANSWER - The four types of
compound options are call on a call, call on a put, put on a call, and put on a put
How is a floating lookback put defined? Does it become more or less valuable as the number of
asset price observations (used to calculate the payoff) increases? - CORRECT ANSWER -
A floating lookback put is an option that pays off the amount by which the maximum asset price
during the option's life exceeds the final asset price. It becomes more valuable as the asset price
is observed more fre-quently in the calculation of the payoff.
List four types of binary options. - CORRECT ANSWER - The four types of binary
options are cash-or-nothing call, cash-or-nothing put, asset-or-nothing call, and asset-or-nothing
put.
ACTUAL Exam Questions and CORRECT
Answers
What is a Bermudan option - CORRECT ANSWER - A Bermudan option is an option that
can be exercised only at certain pre-specified discrete times.
Explain how a futures-style option works - CORRECT ANSWER - A futures-style option
is a futures contract on the option's payoff. The final settlement of the futures contract equals this
payoff.
What is a gap option? - CORRECT ANSWER - A gap option is a European call or put
option where the trigger determining whether there will be a payoff is different from the strike
price used to calculate the payoff
Explain how (a) a chooser option and (b) a forward-start option work - CORRECT
ANSWER - A chooser option is an option with a certain strike price and time to maturity
where at some stage during the option's life the holder will choose whether it is a call or a put. A
forward start option is an option that will come into existence at some future time.
List four types of compound options. - CORRECT ANSWER - The four types of
compound options are call on a call, call on a put, put on a call, and put on a put
How is a floating lookback put defined? Does it become more or less valuable as the number of
asset price observations (used to calculate the payoff) increases? - CORRECT ANSWER -
A floating lookback put is an option that pays off the amount by which the maximum asset price
during the option's life exceeds the final asset price. It becomes more valuable as the asset price
is observed more fre-quently in the calculation of the payoff.
List four types of binary options. - CORRECT ANSWER - The four types of binary
options are cash-or-nothing call, cash-or-nothing put, asset-or-nothing call, and asset-or-nothing
put.
