# Pricing european digital option

From Wikipedia, the free encyclopedia. For asset payouts, however, the distinction is more subtle. A double digital option is a particular variety of option a financial derivative. Assuming an arbitrage-free market, a partial differential equation known as the Black-Scholes equation can be derived to describe the prices of derivative securities as a function of few parameters. The net cost is:

Calculate the pricing european digital option value, risk statistics and probability of hitting the barrier for a knock-out binary barrier call or put option with a payoff of a fixed amount of cash if the barrier is not touched and the option is in the money at expiry, or nothing if the barrier is touched. Owners who wish to realise the full value of their option will mostly prefer to sell it on, rather than exercise it immediately, sacrificing the time value. Conclusion Many pricing european digital option payoffs can be re-created as combinations of vanilla puts and calls. Portfolio valuation and risk analytics for multi-asset derivatives and fixed income. From Wikipedia, the free encyclopedia.

September Learn how and when to remove this template message. As opposed to a slope pricing european digital option 1 between andnow we have a slope of two between and There are other, more unusual exercise styles in which the payoff value remains the same as a standard option as in the pricing european digital option American and European options above but where early exercise occurs differently:. Retrieved from " https: Calculate the fair value, risk statistics and probability of hitting the barrier for a binary barrier option with a payoff of a fixed amount of cash if the barrier is touched, or nothing if the barrier is never touched.

A pricing european digital option is only worth exercising using if the underlying price,is greater than atas the payoff from exercising is. Portfolio valuation and risk analytics for multi-asset derivatives and fixed income. It might look more familiar if I re-wrote it as:

Calculate the fair value, risk statistics and probability of hitting the barrier for a binary barrier option with a payoff equal to the value of the asset if the barrier is not touched, or nothing if the pricing european digital option is touched. You earn from selling the calls, and pay for the calls. The net cost is: