Digital caplet in arrears

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Reference no: EM131245162

Digital caplet in arrears

Consider an option that pays α at time T if LT > K, and zero otherwise.

By considering the payout of this option (a 'digital caplet in arrears') at T + α, show that its price

where D_K(t, T) is the price of a regular digital caplet, and C_K (t, T) is the price of a K-strike caplet with maturity T.

Reference no: EM131245162

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