File Name: Exotic Options – Gap Options
Location: Modeling Toolkit | Exotic Options | Gap Options
Brief Description: Values Gap options, where there are two strike prices with respect to one underlying asset, and where the first strike acts like a barrier that, when breached, triggers the second strike price to come into play
Requirements: Modeling Toolkit
Modeling Toolkit Functions Used: MTGapCallOption, MTGapPutOption
Gap Options are similar to Barrier Options and Two-Asset Correlated Options in the sense that the call option is knocked in when the underlying asset exceeds the reference Strike Price 1, making the option payoff the asset price less Strike Price 2 for the underlying. Similarly, the put option is knocked in only if the underlying asset is less than the reference Strike Price 1, providing a payoff of Strike Price 2 less the underlying asset. See Figure 55.1.
Figure 55.1: Gap options