Pricing dual digital option
This is complemented by an extensive library of white papers, articles and case studies. A Binary Option is an option with a fixed, pre-determined payoff if the underlying instrument or index is at or above the strike at expiration.
The value of the payoff is not affected by the size of the difference between the underlying and the strike price, and can be in the form of a cash payment or delivery of the underlying. The options described here are path independent, which means that the payout profile depends only on the value of the underlying asset on the expiration date of the option.
For a call, the payout is received if the underlying asset price is greater than the strike price, and for a put, the payout is received if the strike is greater than the underlying asset price. The simplest Binary also known as Digital options are cash-or-nothing and asset-or-nothing options. In a cash-or-nothing option, a predetermined amount is paid if the asset is, at option expiry, above call or below put some strike level, independent of the path taken.
An asset-or-nothing option is similar to a cash-or-nothing option except that the holder of the option is entitled to either the full asset value - at option expiry - or nothing. A simple generalization of the asset-or-nothing option is a digital-gap-option. A digital gap option has a payout profile equal to the asset value, less the gap value, depending on whether the asset finishes above or below the strike price.
A double digital option is a particular variety of option a financial derivative. At maturity, the payoff is 1 if the spot price of the underlying asset is between two numbers, the lower and upper strikes of the option; otherwise, it is 0. A double digital option is similar to the exotic option with a few exceptions. The option has two types of strikes namely the lower and the upper strikes.
A double digital with lower strike K 1 and upper strike K 2 can be replicated by going long a digital option with strike K 1 and short another digital option with strike K 2. From Wikipedia, the free encyclopedia. This article has multiple issues. Please help improve it or discuss these issues on the talk page. Learn how and when to remove these template messages. This article is an orphan , as no other articles link to it.
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