Cornerstone Research Interview Question

replicate a binary option with calls and puts

Interview Answers

Anonymous

Oct 13, 2011

You can do it dynamically with combination of the riskless asset and the underlying asset (or you can use the call instead if you wish) to get your black-scholes pde ... or if you combine a call with strike=K and short a call with strike = K+1, you wil get something close. Buying and shorting infinity of these gets you the exact payout but this doesn't really make sense...

1

Anonymous

Oct 8, 2010

buy many calls, sell other calls