Barrier Option

A barrier option is a type of option which is based on a predetermined rate known as a barrier level. Whether or not the price of the underlying asset reaches the barrier level determines whether the underlying asset is bought (call option), sold (put option) or not transacted.

Common types of barrier options include: down-and-in barrier options; down-and-out barrier options; up-and-in barrier options; up-and-out barrier options.

The barrier level may apply to the entire option term, in which case the action attached to a rate falling below or rising above the barrier level will take effect if the rate reaches the barrier level at any point during the option term. In the case of a point barrier option, the barrier only applies on a specific date, and the action only takes effect if the rate reaches or surpasses the barrier level on that date (the last day of the option term, for example).

An option may have multiple barrier levels. For example, a double barrier option has an upper knock-in or knock-out price and a lower knock-in or knock-out price. A mulitple barrier option may also have a series of barrier levels, with a different action attached to each barrier level.

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Editor Daniel Dreier
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