4. Double no-touch optionsis another name for range binaries. Read the following carefully, and then answer the questions at the end. Fluctuating U.S. dollar/yen volatility is prompting option traders managing their books to capture high volatilities through range binary structures while hedging with butterfly trades. Popular trades include one-year double no touch options with barriers of JPY126 and JPY102. Should the currency pair stay within that range, traders could benefit from a USD1 million payout on premiums of 15–20%. On the back of those trades, there was buying of butterfly structures to hedge short vol positions. Traders were seen buying out-of-the-money dollar put/yen calls struck at JPY102 and an out-of-the-money dollar call/yen put struck at JPY126. (Based on an article in Derivatives Week).

(a) Display the payoff diagram of the structure mentioned in the first paragraph.

(b) When do you think these options will be more useful?

(c) What is the role of butterfly structures in this case?

(d) What are the risks of a short position in range binaries?

(e) How much money did such a position make or lose “last Tuesday”?