Digital Option Pricing - Quant Researcher Interview Question
Difficulty: Easy
Category: derivatives
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Topics: options, pricing, black-scholes, quantitative
Problem Description
Digital options, or binary options, are exotic derivatives with discontinuous payoffs that depend on whether the underlying asset price satisfies a specific condition at maturity. These instruments are widely used in quantitative finance for hedging specific price levels and constructing complex payoff profiles. Pricing them under the Black-Scholes framework involves calculating the probability of the option expiring in-the-money, adjusted for risk-neutral valuation.
Task
Implement the function
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