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Binary Option

Binary options provide a simple payoff structure where the buyer receives a fixed payout if the underlying asset price meets a specific target price on a set expiration date. Unlike standard options, binary options have a discontinuous payoff function that provides the full payout with no partial payment if the target is met, and results in no payment if the target is missed. The value of a binary option can be determined using the Black-Scholes model adapted for the discontinuous payoff by considering the probability that the asset price will finish in or out of the target range.

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Luca Pilotti
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54 views

Binary Option

Binary options provide a simple payoff structure where the buyer receives a fixed payout if the underlying asset price meets a specific target price on a set expiration date. Unlike standard options, binary options have a discontinuous payoff function that provides the full payout with no partial payment if the target is met, and results in no payment if the target is missed. The value of a binary option can be determined using the Black-Scholes model adapted for the discontinuous payoff by considering the probability that the asset price will finish in or out of the target range.

Uploaded by

Luca Pilotti
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Binary Options

Mark Rubinstein and Eric Reiner


July 31, 1991

(published under the title: "Unscrambling the Binary Code," in RISK 4 (October 1991), pp. 75-83)

I. contrast to the smooth payoff patterns 8f st andard options, binary options tend to have
uÀ&ð à aEÐ3àÀ A@
à ’Ð• ° À a%PÀ
Àò à à Ð ` is
on function, and the

2
3
where v (u – μt)/σ√t, μ log(r/d) – ½σ2

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