Problem bank

Problem 212 of 333MediumFinanceP212

Pricing a digital call

  1. Under Black-Scholes, a cash-or-nothing digital call pays $1 at time TT if ST>KS_T > K and nothing otherwise. Find its price. Evaluate it for S0=K=100S_0 = K = 100, σ=20%\sigma = 20\%, T=1T = 1, r=5%r = 5\%, and explain how to get the same number from vanilla call prices.