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Digital Contracts: Simple Tools for Pricing Complex Derivatives

Author

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  • Jonathan E. Ingersoll Jr.

    (School of Management)

Abstract

This article presents a simple, unified approach for valuing a variety of financial assets using digital contracts. Three types of digitals are used: a digital option paying either one dollar or nothing, a digital share paying nothing or converting into one share of the underlying asset, and a first-touch digital paying one dollar the first time that the price of the underlying stock moves into some specified region. It is shown how the values of these three types of digitals can be determined for a wide variety of payoff events and how they can be combined to price complex contracts.

Suggested Citation

  • Jonathan E. Ingersoll Jr., 1999. "Digital Contracts: Simple Tools for Pricing Complex Derivatives," Yale School of Management Working Papers ysm130, Yale School of Management.
    • Handle: RePEc:ysm:somwrk:ysm130
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    File URL: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=193971
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    More about this item

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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