Interest Rate Digital Options and Range Notes
THE JOURNAL OF DERIVATIVES, Fall 1995
Posted: 22 Aug 1998
A European interest rate digital call (put) option pays one dollar at maturity if the prespecified reference interest rate is above (below) the strike level, and zero otherwise. A European range digital option pays one dollar if the prespecified reference interest rate lies within a specified range at maturity, and zero otherwise.A range note is a form of floating-rate note. The payment at the end of each period is defined to equal the number of days the reference interest rate lies within a specified range times an interest rate specified at the start of each period.Taking the initial term structure to be exogenous, closed-form solutions are derived for European interest rate digital options, digital range options, and range notes.
JEL Classification: G15
Suggested Citation: Suggested Citation