Hey folks. Just wondering, what kinds of binary securities are there? That is, what securities have only two discrete pay-offs? Alternatively, are there portfolios of securities that can achieve such a result?
Ideally, is there a security that returns (net) 1$ with probability p, and -1$ with probability 1-p?
Thanks!
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http://en.wikipedia.org/wiki/Binary_option
[quote=az2123]http://en.wikipedia.org/wiki/Binary_option[/quote] Anything more short-term? Thanks.
You can find those at a casino.
ha, you sell 1/K piece of call option, then buy delta/K pieces of underlying stock (which is going to be a dynamic hedge) in the end, I believe you portfolio is a binary option...
Yes there are many options with binary payouts. The two main ones are Digitals and Binaries/One-Touches/Barrier Options. First is the European Digital, which if underlying at maturity is > or = (usually) strike it pays out, if not it does not. The american/path-dependent form is called a one touch, it pays out if underlying hits the trigger level at any point during the life of the option. There are many combinations and correlation products that are built using there.
binary option = (e^-rT) * N(d2)
so basically every standard European option will have that portion. So you can replicate binary payout with just the stand call or put and underlying. Barrier option is a different animal, since it's a non-markovian process, therefore the probability density function is more complicated than a simple binary option.
for the college students reading this is completely wrong.
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