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Graphical Representation of Option Price and Sensitivities
A particular type of Binary Options is Cash or Nothing Call, where the options with discontinuous payoffs.
The payoff for the Cash or Nothing Call depends on the underlying's price.
The option pays off nothing if the stock price ends up below the strike price and pays a fixed amount B if it ends up above the strike price.
The second type of Binary Options is called Asset orNothing call.
This pays off nothing if the underlying's price ends up below the strike price and pays an amount equal to the underlying's price if it ends up above the strike price.
Binary Options is a fundamental building block for many exotic options.
We can build a synthetic Barrier Options based on a Binary Option and Call Options.
However, hedging the Binary Options is not easy, but we can try to hedge with Static Replication Technique.
These digital options (as they are also known) can be used to construct more complex products by financial engineers