[Quantlib-dev] Binary Options

[Ferdinando A. <na...@am...>]

Hi Neil

I've just committed slight changes to VanillaOption and BarrierOption in 
order to have them use the Payoff class instead of the (type, stike) couple.
I had some problem with BinaryOption, namely with the enumeration 
CashAtHit, CashAtExpiry.
I would appreciate your feedback about the following.

The classic european call option with binary payoff is H * 1(S-K), where K 
is the strike, H is a cash amount, and 1(x) is 1 if x>=0, 0 if x>0. This is 
a "cash" binary payoff.
The equivalent American option is the so-called One-Touch option: it has 
the same payoff, but it is paid as soon as S>=K.

There is also the option with asset binary payoff, where the payoff is S * 
1(S-K), with its european and american versions.

If I got your CashAtHit right, it is what I would call an american option 
with cash binary payoff.
As for CashAtExpiry, it seems to me like an european lookback option with 
cash binary payoff: at expiry you look back for the max value of the 
underlying during the life of the option and then calculate a cash binary 
payoff using the max value instead of the terminal underlying asset value

I would re-factor your code so that the enumeration CashAtHit, CashAtExpiry 
will disappear,  replaced by european and american options with cash/asset 
binary payoff.

I would then add (probably later) the lookback option, with plain payoff 
and binary payoff.


A related question I have is where to find documentation for the analytic 
American binary engine: any paper you would suggest?

thank you

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ciao -- Nando