A forward option that is capped with a knock-out barrier. This option allows its holder to accumulate gains (paper gains) on trading days within the period specified in the contract when the market price of the underlying share is above the strike price. The gains will not be realized until the underlying stock is sold (with the gains being the accumulated difference between market price and strike price, provided that market price is above the strike price). The upside potential, however, is capped by a knock-out barrier. The holder will cease to accumulate any gains once the spot price trades at or beyond the pre-determined knock-out barrier.
This product suits investors who seek to take a view that the underlying price will move within a defined range between the strike price and the knock-out barrier. Nevertheless, at times of high market volatility, market prices will most probably defy such a general assumption about range-bound price movement.
The knock-out forward option is also known as an accumulator.
Comments