Table of Contents
How are barrier options priced?
Barrier options are priced by computing the discounted expected values of their claim payoffs, or by PDE arguments. C = φ(ST ), depend only using the terminal value ST of the price process via a payoff function φ, and can be priced by the computation of path integrals, see Sec- tion 17.2.
What is a double barrier option?
A double barrier option is an exotic option whose payoff is determined given two barrier levels: an upper and a lower price. Depending on whether the option is a knock-in or knock-out, if the underlying price touches either barrier before its expiration the option will either become active or worthless, respectively.
When the asset needs to move down and beyond barrier price for the barrier option to become active is called?
The four main types of barrier options are: Up-and-out: spot price starts below the barrier level and has to move up for the option to be knocked out. Down-and-out: spot price starts above the barrier level and has to move down for the option to become null and void.
How does a barrier option work?
A barrier option is a type of derivative where the payoff depends on whether or not the underlying asset has reached or exceeded a predetermined price. It can also be a knock-in, meaning it has no value until the underlying reaches a certain price.
What is a lookback call option?
Financial Terms By: l. Lookback option. An option that allows the buyer to choose as the option strike price any price of the underlying asset that has occurred during the life of the option. For a call option, the buyer will choose the minimum price; for a put option, the buyer will choose the maximum price.
Where are barrier options mostly traded?
These options are commonly traded in the foreign exchange and equity markets. As an example, let’s say a barrier option has a knock-out price of $100 and a strike price of $90, with the stock currently trading at $80 per share.
What is a no touch option?
Key Takeaways. A double no-touch option is a binary option where the buyer receives a fixed payout if the underlying price remains within specified price boundaries until expiration. If the price touches or exceeds the price boundaries (either above or below) at any time, the trader loses what they paid for the option.
What is a down-and-out call option?
What Is a Down-and-Out Option? A down-and-out option is a type of exotic option known as a barrier option. These options define the payout conditions based on whether the price falls enough from the strike price to reach a designated barrier price.
What is a barrier level?
In options trading, the term barrier level denotes a predefined rate which determines the outcome of a barrier option. In the case of up-and-out barrier options, the barrier level is the price or rate which, if exceeded by the price or rate of the underlying asset, renders the option invalid (out of the money).
What is lookback straddle?
The lookback straddle is a derivative security that pays the holder the difference of the maximum and minimum prices of the underlying asset over a given time period. Then a lookback straddle is simply a combination of a lookback put, which pays Page 3 3 Smax – ST and a lookback call which pays ST – Smin .
What is put call parity theorem?
Put-call parity states that the simultaneous purchase and sale of a European call and put option of the same class (same underlying asset, strike price, and expiration date) is identical to buying the underlying asset right now. The inverse of this relationship would also be true.
Why are barrier options are traded only in OTC markets?
Barrier options contracts are traded only in the over the counter markets rather than the more accessible exchanges. The OTC markets are not as easy to access as not all brokers will allow you to buy and sell contracts that are not traded on the public exchanges.