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What is the market price of a digital option

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Suppose the S&P 500 pays a dividend yield of 2%, and options traders believe the market's volatility over the next year will be 20% (i.e., one-year options on the S&P 500 are trading at implied volatilities of 20%). One-year zero-coupon bonds are trading at 0.98 per dollar of face (a 2% annual interest rate). What is the market price of a digital option on the S&P 500 that pays $1 in one year if and only if the price of the index is higher in one year than it is today?

Reference no: EM133122485

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