Digital Options Pricing

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A Digital option has a predefined payoff. For most options the payoff of an option is unknown and is only known upon exerciseof the option, which the payoff for a call option being the asset price on exericise less the strike price of the options. In contrast a digital option has the payoff defined when the option is issued.

The payoff of a Digital option is preset to be either a cash amount (as in a Cash-or-Nothing option) or a unit of the underlying option (ie an Asset-or-Nothing option). For example a Cash-or-Nothing option on a stock would either payoff zero or a fixed cash at expiry, similary an Asset-or-Nothing option would either payoff zero or a fixed number of stocks.