Question
Options question, Exercise 3A: A binary option pays an amount of money if an event takes place and zero otherwise. Binary options are usually used
Options question, Exercise 3A:
A binary option pays an amount of money if an event takes place and zero otherwise. Binary options are usually used to insure portfolios against large drops in the stock market. On February 25, 2020 the price of a binary option that pays one dollar if the S&P500 falls by more than 10% (e.g., -10% and below) within one year from today is $0.30. At the same time, the price of a binary option that pays one dollar if the S&P500 increases by more than 10% (e.g., +10% and above) within one year from today is $0.20. Using a non-arbitrage argument, derive the price of a binary option that pays $1 if the S&P500 is within [-10%, 10%] one year from today.
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