**16.01** If the cash-or-nothing call option pays (Q), what is the value of the binary option? bonus: explain the formula intuitively. | Financial Risk Manager Part 1 Quiz - LeetQuiz
Financial Risk Manager Part 1
Explanation:
Correct answer: D.
The value of a cash-or-nothing binary call is:
QeβrTN(d2β)
Intuition
Q is the fixed cash payout if the option finishes in the money.
eβrT discounts that future cash payment back to present value.
N(d2β) is the risk-neutral probability that the option expires in the money and pays out.
So the option value is essentially:
Present value of the payout Γ probability of receiving the payout
That is why the formula uses N(d2β), not N(d1β).
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16.01 If the cash-or-nothing call option pays (Q), what is the value of the binary option? bonus: explain the formula intuitively.