A double digital option is a particular variety of
option
Option or Options may refer to:
Computing
*Option key, a key on Apple computer keyboards
*Option type, a polymorphic data type in programming languages
*Command-line option, an optional parameter to a command
*OPTIONS, an HTTP request method
...
(a
financial derivative
In finance, a derivative is a contract that ''derives'' its value from the performance of an underlying entity. This underlying entity can be an asset, index, or interest rate, and is often simply called the "underlying". Derivatives can be ...
). At maturity, the payoff is 1 if the spot price of the underlying asset is between two numbers, the lower and upper strikes of the option; otherwise, it is 0.
A double digital option is similar to the
exotic option
In finance, an exotic option is an option which has features making it more complex than commonly traded vanilla options. Like the more general exotic derivatives they may have several triggers relating to determination of payoff. An exotic op ...
with a few exceptions. for instance a double digital option has two strike prices that is the expected price during the trade season. The option has two types of strikes namely the lower and the upper strikes.
A double digital with lower strike ''K
1'' and upper strike ''K
2'' can be replicated by going long a
digital option with strike ''K
1'' and short another digital option with strike ''K
2''.
References
Options (finance)
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