A chooser option (also known as an as-you-like-it option) becomes a put or call at the discretion

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A chooser option (also known as an as-you-like-it option) becomes a put or call at the discretion of the owner. For example, consider a chooser on the S&R index for which both the call, with value C(St , K, T − t), and the put, with value P(St , K, T − t), have a strike price ofK. The index pays no dividends. At the choice date, t1, the payoff of the chooser is max[C(St1, K, T − t1), P(St1, K, T − t1)]
a. If the chooser option and the underlying options expire simultaneously, what ordinary option position is this equivalent to?
b. Suppose that the chooser must be exercised at t1 and that the underlying options expire at T. Show that the chooser is equivalent to a call option with strike price K and maturity T plus e−δ(T−t1) put options with strike price
Ke−(r−δ)(T−t1)
and expiration t1.
Strike Price
In finance, the strike price of an option is the fixed price at which the owner of the option can buy, or sell, the underlying security or commodity.
Maturity
Maturity is the date on which the life of a transaction or financial instrument ends, after which it must either be renewed, or it will cease to exist. The term is commonly used for deposits, foreign exchange spot, and forward transactions, interest...
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Related Book For  answer-question

Derivatives Markets

ISBN: 9789332536746

3rd Edition

Authors: Robert McDonald

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