Barrier Option


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Barrier Option

An option contract that may only be exercised when the underlying asset reaches some barrier price. A barrier option may either be a knock-in or a knock-out. A knock-in may only be exercised when the underlying asset rises above or falls below (depending on the particular terms) the barrier price. On the other hand, a knock-out automatically expires when the underlying asset rises above or falls below the barrier price. It is important to note that the barrier price is distinct from the exercise price, though, theoretically, they may be set at the same amount. See also: Exotic option.
References in periodicals archive ?
This unique dual approach of a physical barrier and spermiostatic environment is designed to provide a contraceptive effect consistent with the most effective barrier option, the diaphragm, and commonly used short-acting hormonal options, which provide 88-91% effectiveness in "typical use." All other commonly used or soon to be marketed hormone-free contraceptive products are used at, or shortly before, coitus and do not achieve "typical use" contraceptive effectiveness comparable to hormonal methods or are not self-administered.
This water-based coating provides brands a durable and transparent high oxygen barrier option.
A barrier option is a path-dependent option which is exterminated (knocked out) or initiated (knocked in) if the underlying spot price hits the specified barrier level during the life of the option.
The barrier option is one of those exotic options where the payoff of the option depends on the path of its underlying asset.
However, the payoff of a barrier option is much more dependent on the joint distribution of the underlying asset price at different points in time than is the payoff for a compound option.
Hui, 1997, "Time-Dependent Barrier Option Values", Journal of Futures Markets, 17:667-688
This mechanism is shown to significantly reduce the insolvency risk of the issued contracts, and it implies that the various claims on the company's assets become more exotic and obtain barrier option properties.
(15.) An example of a barrier option is a down-and-out call option in which a regular call option gets knocked out; that is, it ceases to exist if the asset price hits a certain preset level.
Staikouras, 2004, "Insurance Companies and Firm-Wide Risk: A Barrier Option Approach", Journal of Insurance Research and Practice, 19:62-70