YouTube T3-44 - Exotic options: binary (aka, digital) option

[Nicole Seaman]

A binary (aka, digital) option can be either an asset-or-nothing binary or a cash-or-nothing. The asset-or-nothing call pays the full asset price if the stock price exceeds the strike price at maturity; the cash-or-nothing call pays a fixed cash amount, denoted "Q," if the stock price exceeds the strike price at maturity. The key to valuation is to realize that the asset-or-nothing is equivalent to (i.e., its payoff is equal to) the portfolio consisting of a standard option plus a cash-or-nothing (conditional on K = Q).

David's XLS: https://trtl.bz/2PqyFVk

 

[Rblc]

Hello @David Harper CFA FRM , BT Community , I have 2 questions not at all related to the syllabus of the FRM.



In your opinion:
1. Do binary option provide "added value" to the derivatives market in general compared to other financial products ? By that I mean do they provide a "service" that cannot be had with other financial products or perhap more efficiently than other financial products?

2. These options look like pure speculation tools is that correct? Are there cases where this options would be preferred for hedging rather than another option type?

When researching these options, I found that they were often compared to betting and are sometimes even regulated by betting authorities?

Many European countries outright ban the use of Binary options to retail investors citing fraud.

Example france and britain
https://www.financemagnates.com/bin...y-options-ban-for-retail-investors-permanent/
https://www.financemagnates.com/bin...ontinues-crackdown-on-binary-options-brokers/

ESMA even temporarily banned binary options for a time.
https://www.ft.com/content/7a792356-7f79-11e8-8e67-1e1a0846c475