A digital default option is a call option whose payoff increases as a yield spread increases above a stated exercise spread.

Question

Quizplus · Accepted Answer

A digital default option, also known as a binary or digital option, pays off a fixed amount if the underlying asset is above (for a call) or below (for a put) the exercise price at expiration. It does not have a payoff that increases as a yield spread increases; its payoff is fixed.

A Digital Default Option Is a Call Option Whose Payoff