touchbybls

Price one-touch and no-touch binary options using Black-Scholes option pricing model

Description

example

Price = touchybls(RateSpec,StockSpec,Settle,Maturity,BarrierSpec,Barrier,Payoff) calculates one-touch and no-touch binary options using the Black-Scholes option pricing model.

Examples

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Compute the price of a one-touch option using the following data:

AssetPrice = 105;
Rate = 0.1;
Volatility = 0.2;
Settle = '01-Jan-2018';
Maturity = '01-Jul-2018';

Define the RateSpec using intenvset.

RateSpec = intenvset('ValuationDate', Settle, 'StartDates', Settle, 'EndDates', ...
Maturity, 'Rates', Rate, 'Compounding', -1);

Define the StockSpec using stockspec.

DividendType = "Continuous";
DividendYield = Rate - 0.1;
StockSpec = stockspec(Volatility, AssetPrice, DividendType, DividendYield);

Calculate the price of a one-touch binary option.

BarrierSpec = "OT";
Barrier = 100;
Payoff = 15;
 
Price = touchbybls(RateSpec, StockSpec, Settle, Maturity, BarrierSpec, Barrier, Payoff)
Price = 9.7264

Input Arguments

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Interest-rate term structure (annualized and continuously compounded), specified by the RateSpec obtained from intenvset. For information on the interest-rate specification, see intenvset.

Data Types: struct

Stock specification for the underlying asset. For information on the stock specification, see stockspec.

stockspec handles several types of underlying assets. For example, for physical commodities, the price is StockSpec.Asset, the volatility is StockSpec.Sigma, and the convenience yield is StockSpec.DividendAmounts.

Data Types: struct

Settlement or trade date for the touch option, specified as an NINST-by-1 matrix using serial date numbers, date character vectors, or datetime objects.

Data Types: double | char | datetime

Maturity date for the touch option, specified as an NINST-by-1 vector of serial date numbers or date character vectors.

Data Types: double | char | cell

Barrier option type, specified as an NINST-by-1 cell array of character vectors with the following values:

  • 'OT' — One-touch

    The one-touch option provides a payoff if the underlying asset ever trades at or beyond the Barrier level. Otherwise, the Payoff is zero.

  • 'NT' — No-touch

    The no-touch option provides a Payoff if the underlying asset never trades at or beyond the Barrier level. Otherwise, the Payoff is zero.

Data Types: char | cell

Barrier value, specified as an NINST-by-1 matrix of numeric values.

Data Types: double

Payoff value, specified as an NINST-by-1 matrix of numeric values.

Note

The payoff value is calculated for the point in time that the Barrier value is reached. The payoff is either cash or nothing. If a no-touch option is specified using the BarrierSpec, the payoff is at the Maturity of the option.

Data Types: double

Output Arguments

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Expected prices for one-touch options at time 0, returned as an NINST-by-1 matrix.

More About

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Touch and No-Touch Options

The one-touch and no-touch options provide a payoff if the underlying spot either ever or never trades at or beyond the barrier level. Otherwise, the payoff is zero.

Only two outcomes are possible with a one-touch option if a trader holds the contract all the way through expiration:

  • The target price (Barrier) is reached and the trader collects the full premium.

  • The target price (Barrier) is not reached and the trader loses the amount originally paid to open the trade.

References

[1] Haug, E. The Complete Guide to Option Pricing Formulas. McGraw-Hill Education, 2007.

[2] Wystup, U. FX Options and Structured Products. Wiley Finance, 2007.

Introduced in R2019b