A path-independent option is
A)An option where the price process is not continuous,i.e. ,it does not follow a smooth path,but jumps from one value to the next.
B)An option where the option payoff depends on the price of the underlying asset at exercise time but not on the details of the price path followed to that point.
C)An option where the option payoff is independent of anything that happens to the price of the underlying after inception.
D)An option where the option payoff is constant regardless of the path taken by the price of the underlying.

Question

Quizplus · Accepted Answer

A path-independent option is an option where the payoff at expiration depends only on the price of the underlying asset at that time and not on the path taken to get there. This means that the option can be exercised at any point along the way without affecting the payoff, as long as it is exercised at expiration. This is also known as a European-style option, as opposed to an American-style option, which can be exercised at any point up to expiration and therefore has a payoff that depends not only on the price at expiration but also on the path taken to that point. Option A is referring to a jump process, which is not relevant to the concept of path-independence. Option C is incorrect because a path-independent option can still be affected by events that happen before expiration, as long as they are reflected in the price at that time. Option D is incorrect because the payoff of a path-independent option can still vary depending on the price at expiration.

A Path-Independent Option Is