AppliedMultiple choice
Pricing and hedging a digital · Part 2 of 3
A one-year digital call pays $1 if a stock, now at $100, finishes above $100. Rates are zero and at-the-money implied volatility is 20%.
You have sold the digital and want to hedge it with a tight call spread that never pays less than the digital. Which spread do you buy?
- AThe 99–100 call spread
- BThe 100–101 call spread
- CThe 99.5–100.5 call spread, split evenly around the strike
- DA single at-the-money call, scaled by its delta
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