Pricing a digital from a call spread
A cash-or-nothing binary call pays $1 if (strike $100). You have no pricing model, but you can see two vanilla call quotes on the same stock and expiry: the $99-strike call trades at $6.00 and the $101-strike call at $5.20. Using only these, estimate the fair value of the $100 digital, in dollars to two places.
Show hints (2)+
- A digital call is the slope — replicate it with a narrow, width-scaled call spread.
- Estimate: , dividing by the $2 strike gap.
Answer
Reveal answer →Final answer
0.4 (± 0.001)
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Asked at: Jane Street, Citadel