An option that yields either a fixed amount or nothing at all on the expiration date (thus the option is binary in nature because there is only two possible outcomes: the payoff is either some fixed amount of some asset or nothing at all). – For the European type of digital option, the payoff occurs as soon as the price of the underlying asset – i.e. the asset underlying the contract – exceeds (digital call option) or falls below (digital put option) the strike price on the exercise date. – In the case of an American digital option, the fixed amount is due immediately upon the occurrence of this circumstance – i.e., not only on the exercise date – or is committed on the maturity date. Accordingly, the American form is less expensive than the European form because the prospects of payment are higher. – A distinction is made between cash-or-nothing options, where a fixed sum is to be paid out as soon as the strike price is above the exercise price. In contrast, in the case of an asset-or-nothing option, the underlying is delivered when this condition is met.
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