8006 Exam Dumps | [According to the PRMIA study guide for Exam 1, Simple Exotics and Convertible Bonds have been excluded

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PRMIA.8006.v2021-04-25.q101
Question 65

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Question 65/101

[According to the PRMIA study guide for Exam 1, Simple Exotics and Convertible Bonds have been excluded from the syllabus. You may choose to ignore this question. It appears here solely because the Handbook continues to have these chapters.] A long call position in an asset-or-nothing option has the same payoff as:

A. two long cash-or-nothing calls combined with a put at the same strike

B. a contingent premium option

C. a short cash-or-nothing call and a short vanilla call

D. a long cash-or-nothing call and a long vanilla call

Correct Answer: D

Explanation
A cash or nothing call is one that pays a fixed amount if the underlying exceeds a certain threshold, or nothing.
An asset or nothing call is the same as the cash or nothing call except that instead of paying a fixed amount, it
'pays' the asset. Therefore the payoff profile of a long asset or nothing call has the same payoff as a long cash or nothing call and a long vanilla call.
This is best considered by building payoff diagrams which will show how the two positions are economically equivalent. Choice 'd' is the correct answer, and the rest are not.

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