hard · FRM Part 1 Financial Markets and Products
A knock-in call option is currently priced at 2.50, and the identical knock-out call is priced at5.00.
If the risk-free rate increases, which component of the in-out parity equation (c + Ke^-rT = p + S_0e^-qT) is most directly affected if we were evaluating put-call parity for these exotics?
- The barrier level itself, fixed by contract
- The in-out parity identity itself, a structural rule
- The present value of the strike price (Ke^-rT)
- The probability of hitting the barrier before expiry
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