A category of path-dependent options in which the option’s payoff depends on the “extreme” price (either up or down) attained by the underlying asset. A good example is a barrier option, in which the holder is required to specify the trigger price, in addition to the exercise price and maturity date. When the underlying price reaches or breaks through this trigger price, the option will activate (knock-in) or deactivate (knock-out). Another example is a double barrier option in which there exist two knock-out triggers- that is, it can deactivate at either of two levels (an upper boundary and a lower boundary).
November 19, 2023