Question: A binary (a.k.a. digital, all-or-nothing) call option has a strike price of $47. It also has a knock-out barrier of $55. If the option pays

A binary (a.k.a. digital, all-or-nothing) call option has a strike price of $47. It also has a knock-out barrier of $55. If the option pays you at expiration, it pays you exactly $10. The risk-free rate is 4.6% per period. If the underlying asset goes up, it will go up 20% per period and if it goes down, it will go down 10% per period. The underlying asset currently costs $50. The option expires in 2 periods. How much is this option worth today?

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Answer: 4.57

Note from professor: I just made this one up. To my knowledge, "Binarrier Options" don't exist, but maybe they do.

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