In finance, a barrier option is an exotic derivative typically an option on the underlying asset whose price breaching the pre-set barrier level either springs the option into existence or extinguishes an already existing option.
- Where the option springs into existence on the price of the underlying asset breaching a barrier, it may be known as an "up and in," "knock-in," or "down and in" option.
- Where the option is extinguished on the price of the underlying asset breaching a barrier, it may be known as an "up and out," "knock-out," or "down and out" option.
Barrier options are always cheaper than a similar option without barrier. Thus, barrier options were created to provide the insurance value of an option without charging as much premium. For example, if you believe that IBM will go up this year, but are willing to bet that it won't go above $200, then you can buy the barrier and pay less premium than the vanilla option.
Read more about Barrier Option: Types, Barrier Events, Variations, Valuation
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