A KIKO option (knock-in knock-out option) that has two American barriers (as an American barrier option) where its payoff gets activated once the knock-in barrier is breached. However, once the knock-out barrier is touched, the option deactivates and dies out (gets knocked out). In other words, this option has a vanilla payoff at expiration date and is subject to two American barriers: one is in the money while the other is out of the money.
If the spot price did not touch either KIKO barrier at expiration, there would be no payoff and the option expires worthless. And if the spot price touches the knock-out barrier first, the option also expires worthless and provides no payoff at maturity. However, when the spot price touches the knock-in barrier first, the structure gets activated and at maturity it provides a vanilla payoff.
Comments