A binary option pays of $100 if a non-dividend-paying stock price is greater than its current value in three months.The risk-free rate is 3% and the volatility is 40%.Which of the following is its value?
A)99.25N(-0.1375)
B)99.25N(0.1375)
C)99.25N(-0.0625)
D)99.25N(0.0625)

Question

Quizplus · Accepted Answer

The binary call option is worth 100N(d₂)e^-0.03×0.25.In this case S₀ = K so than ln(S₀/K)= 1 and $d _ { 2 } = \frac { \left( 0.03 - 0.4 ^ { 2 } / 2 \right) \times 0.25 } { 0.4 \times \sqrt { 0.25 } } = - 0.0625$

A Binary Option Pays of $100 If a Non-Dividend-Paying Stock