Tell me more ×
Quantitative Finance Stack Exchange is a question and answer site for finance professionals and academics. It's 100% free, no registration required.
up vote 6 down vote favorite
2

A binary option with payout \$0/\$100 is trading at \$30 with 12 hours to expiration.

Assuming the underlying follows a geometric Brownian motion (hence volatility remains constant), what probability distribution describes the option's maximum price between now and expiration?

I'm looking for a generic "formula". Even though I used price and expiration, I'm assuming the generic formula is a function of volatility (of course, price and expiration determine volatility).

share|improve this question
You'll have to assume the dynamics of the underlying asset. You have a model in mind? GBM? It could help somebody posting an answer. – SRKX♦ Oct 16 '11 at 6:38
Good point. I was thinking Black-Scholes. – barrycarter Oct 16 '11 at 11:26
I'd bet there is no closed-form solution. You are asking for the maximum of a highly unusual random process (i.e. the option TV process). – Brian B Oct 17 '11 at 16:11
I'd settle for a non-closed-form solution or approximation. This could be modeled as a random walk with drift, but the drift itself changes with each step. – barrycarter Oct 17 '11 at 16:41
Clarify the question: do you mean - if we consider price series of a binary option, what is the PDF of maximum of the price of such option? – onlyvix.blogspot.com May 27 '12 at 0:03

Know someone who can answer? Share a link to this question via email, Google+, Twitter, or Facebook.

Your Answer

 
discard

By posting your answer, you agree to the privacy policy and terms of service.

Browse other questions tagged or ask your own question.