Reference no: EM131731277

Question: Consider two indices: a gold index and a copper index. Consider a European option that pays 0% if the gold index has performance equal to or better than - 2% relative to the copper index. For each percentage point that the gold index return is worse than 2% below the copper index, the option pays 1% of its notional value. Describe the type of option and its strike price in terms of both calls and puts. Answer: The option is a spread option. In the case of a spread put, the strike price of the put is -2%, and the spread is defined as the performance of the gold index less the performance of the copper index. In the case of a spread call, the strike price of the call is +2%, and the spread is defined as the performance of the copper index less the performance of the gold index.