Has anyone heard of these? FROs also called “Binary Options”? They’re basically options that pay a fixed amount only if they are exercised in-the-money. I was wondering if they serve any legitimate trading needs or hedging strategies or if they’re just a new gimmick?
credit options are binary in nature, payout is fixed. certainly serve an economic purpose.
I’m not sure they are very new. They have been around forever (“I’ll buy beer if you pay me $50 if the Red Sox score more than 6 runs off Zito”). Suppose that I am going to plant a crop of corn, but if the price of corn drops below $5 before I have invested 1/3 of my planting costs I’m going to abandon the project and get nothing for my crop. That’s a legitimate business strategy and you could hedge that pretty easily with a binary put on corn.
How 'bout exotics options like digitals or window digitals? They are dealt in European terms and pay a fixed amt given the option finishes ITM. I have an Asian banking client that has been trading them for a few years. This client also trades single and double barrier knock in & knock outs, but they are technically not binaries since they turn into plain vanillas once the trigger is hit. If I remember correctly, exotics are cheaper than vanillas since there are more constraints associated with the payoff.