Demystifying digital options

Demystifying digital options


The digital is the closest traded option that resembles an ordinary bet. "Do you want to bet, for a keg of beer, that it is going to rain tomorrow?" This bet pays out nothing or a keg of beer, depending on the rain event taking place or not.

Digital options are embedded in a large portion of structured products issued by banks, including autocallable and yield optimisation notes, and reverse convertibles. The digital option is characterised by a jump in payoff, or a discontinuous payoff based on

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