What are Barrier Options?
Barrier options are a type of exotic options, in which the payoff demands reaching or crossing of a barrier (predetermined price) by the underlying product. They include call options and put options, and are similar to common options in many respects. Barrier options become active/inactive when the underlying product crosses the barrier.
Barrier options can be grouped into two as knock-in options and knock-out options. Knock-in barrier options are inactive options at the beginning, but become active when the barrier reaches. On the other hand Knock-out options starts as active but become inactive on reaching the barrier. Many barrier options carry rebates, which are paid off to the holder on reaching the barrier.
Barrier options are available in both European and American forms. In barrier options trading, premiums are paid in advance. Barrier options come in 8 flavors like up & out, up & in, down & out, and down & in. Of these eight flavors 4 are reverse barrier options, which when in-the-money knock-in or knock-out. Barrier options include single barrier, double barrier, partial time barrier and Parisians options.
Barrier options can be grouped into two as knock-in options and knock-out options. Knock-in barrier options are inactive options at the beginning, but become active when the barrier reaches. On the other hand Knock-out options starts as active but become inactive on reaching the barrier. Many barrier options carry rebates, which are paid off to the holder on reaching the barrier.
Barrier options are available in both European and American forms. In barrier options trading, premiums are paid in advance. Barrier options come in 8 flavors like up & out, up & in, down & out, and down & in. Of these eight flavors 4 are reverse barrier options, which when in-the-money knock-in or knock-out. Barrier options include single barrier, double barrier, partial time barrier and Parisians options.
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