Hi all

Why the european binary call can be mathematically priced as follows if they can be perfectly hedge by a bull call spread:

binary call = (c(K+h) - c(K))/h when h is going infinitely small. K is the strike of the binary, h is the strike price difference between the two calls of the bull call spread,c is the price of the calls of the call spread. I know it is related to the volatility skew in between the two strike prices of the spread, but I don't understand the mathematical equation.

thanks in advance!

Why the european binary call can be mathematically priced as follows if they can be perfectly hedge by a bull call spread:

binary call = (c(K+h) - c(K))/h when h is going infinitely small. K is the strike of the binary, h is the strike price difference between the two calls of the bull call spread,c is the price of the calls of the call spread. I know it is related to the volatility skew in between the two strike prices of the spread, but I don't understand the mathematical equation.

thanks in advance!

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