FoundationMultiple choice
In, out and the vanilla · Part 1 of 3
One-year calls on a stock at $100 have a strike of $100; rates are zero and volatility is 20%, so the vanilla call is worth $7.97. Barrier versions have a barrier at $90, monitored continuously.
You buy both the down-and-in call and the down-and-out call with the $90 barrier. What do you hold?
- AExactly the vanilla $100 call
- BA call that pays only if the stock stays above $90 throughout
- CTwo vanilla calls, since each pays like a call once it is alive
- DNothing, because the knock-in and knock-out cancel each other out
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