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Quantitative Finance · Glossary

What is Barrier option, knock-out, knock-in?

Also known as: barrier option · knock-out option · knock-in option

Definition 19.7 Markets II: Rates, FX and Credit · Chapter 19 — The FX Options Market

A barrier option is an option whose existence depends on whether spot touches a level, the barrier, before expiry. A knock-out option ceases to exist when the barrier is touched; a knock-in option comes into existence only then.

A three-month EURUSD down-and-out call, strike 1.1464, barrier 1.1200, volatility 7%: its value (left) and its delta (right) by spot. The value falls to zero at the barrier, but the delta does not: it stays near 0.63 until the touch and then drops to zero. Illustrative; data: the chapter’s tutorial.
Figure 19.4. A three-month EURUSD down-and-out call, strike 1.1464, barrier 1.1200, volatility 7%: its value (left) and its delta (right) by spot. The value falls to zero at the barrier, but the delta does not: it stays near 0.63 until the touch and then drops to zero. Illustrative; data: the chapter’s tutorial.
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