hard · FRM Part 1 Valuation and Risk Models
A binary 'cash-or-nothing' call option pays 50 if the stock price is above $100 at expiry.
As the option approaches expiry with the stock price very close to $100, what happens to the option's Delta?
- Delta becomes extremely large and unstable (explosive), creating significant hedging challenges.
- Delta decays to zero as time value erodes.
- Delta stabilizes at 0.50 regardless of the volatility.
- Delta remains constant because the payoff is fixed at $50.
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