Digital Option pricing engine uses Monte Carlo Simulation to estimate the value of digital option. Here, we assume the process of asset pricing applies to Black-Scholes process.
Digital option is an option whose payoff is characterized as having only two potential values: a fixed payout, when the option is in the money or a zero payout otherwise. It is not related to how far the asset price at maturity is above (call) or below (put) the strike.
Digital options are attractive to buyers because the option payoff is a known constant amount, and this amount can be adjusted to provide the exact quantity of protection required. It overcomes a fundamental problem with the vanilla options, where the potential loss is unlimited, referring to the wiki.
Note
Only one type of digital options is supported:
- Cash-or-nothing option: Pays some fixed amount of cash if the option expires in the money.
- Asset-or-nothing option (not supported)