Abstract
Barrier option may be either of the Knock Ins or the Knock Outs types. The price of barrier option depends upon underliers, in addition to the market volatility. The article below reveals certain aspects of the barrier option.
Barrier option may be defined as a "path dependent" option. An option may be defined as a contract, wherein one party, (may be the option holder) is given "the right, but not the obligation" to carry out a transaction pertaining to any property with the option writer or option issuer (the other party) as per norms specified. Barrier option may be either:
Knock Ins
Knock Outs
Price Of A Barrier Option:
Price pertaining to barrier option is determined by the volatility of the markets. However, the price is determined by the value of the underliers. Underliers may be defined as the values, which determine the value of a derivative. For instance, stock option may be referred to as a derivative. The reason being the value of a stock determines the value of the derivative. Another factor that decides the price of the derivative (barrier option) is the probable attainment of the barrier.
The following exemplifies barrier option:
FX Knock Out Options
Knock In Caps And Floors
FX Knock In Options
Knock Out Caps And Floors
Barrier Option And Investors:
Owing to the fact that the barrier option is less expensive than the traditional options, they have appealed to a number of investors. Borrowers can also use barrier option when a "trigger level" being reached determines the underliers. This may be either in different or same markets.
Advantages Of Barrier Option:
Comparatively cheaper
Flexible as far as the barrier level as well as the cost is concerned.
Has the advantage of being linked to any underlier.
