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Derivatives

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  • November 9, 2021
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Money-Back Option

A contingent payment option which guarantees to return the premium at expiration if the option is not exercised. Also, a money back option may entail paying the premium back to the holder if the underlying finishes in the money. Money back options have embedded digital options, and as such the payoff of a money-back call option, for instance, is simply that of a standard call plus that of a digital call times the premium that the holder has paid. The value of the premium, i.e., the price of this money back call at inception is equal to the price of the call option divided by “one minus the price of the digital option”.


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