low and shall be further used.

Table 2: Strikes (vertical) and lifetimes (horizontal)

K \TTM 1M 3M 6M 1Y 2Y 3Y
80 40.91% 30.77% 25.02% 25.68% 28.28% 28.23%
85 45.74% 29.52% 28.60% 27.15% 28.29% 27.87%
90 35.54% 23.46% 26.24% 29.48% 29.19% 27.18%
95 22.07% 27.49% 26.39% 27.11% 28.36% 27.89%
100 27.36% 26.19% 29.19% 27.69% 28.44% 29.12%
105 25.95% 27.41% 27.80% 28.59% 28.57% 28.93%
110 28.56% 24.22% 27.21% 28.49% 28.11% 27.92%
115 29.11% 26.06% 28.95% 26.72% 26.95% 26.99%
120 25.69% 27.08% 29.65% 25.91% 24.61% 25.62%

3.3 Q1: Pricing and its methodologies

We can find an approximate price through (at least )three methods:
M1. By partial replication.
M2. By using implied risk neutral distribution of ST from property 2.0.1
M3. Through B & S formula pricing.

Instrument A:
M1: Partial replication could entail:
A long/short position on calls with strikes K1 = 95, K2 = 100, maturities =
1 year and exposures w1 = 51 , w2 = − 15 .
The resulting cost would then be 15 · (c(95; 1) − c(100; 1)) = 0.435

Another approximate (sub)replication could be:

A long/short position on calls with strikes K1 = 100, K2 = 100, maturities =
1 year and exposures w1 = 15 , w2 = − 51 (1/5 of the notional). The cost is 0.34.

We have therefore provided bounds for the real value of the digital op-
tion.