A one-touch option which pays a preset amount at the point when the underlying touches the barrier, rather than at the option’s maturity date. For example, in its call version, this option has a fixed monetary payoff if the barrier is triggered before maturity and zero otherwise. The price of the American digital call has to be equal to the intrinsic value of its payoff at the barrier contact. Since it is optimal to exercise American options when their prices are equal to the intrinsic values, it would be also optimal to exercise the American digital call at the first time that the barrier level is reached. This option is slightly costlier than the one-touch digital because it allows the holder to gain at the point of barrier breach and is the most common of all types of digital options traded in the interbank market.
This option is also known as a digital instant one-touch option.
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