Double barrier digital option
Generally, the barriers are used to define a range within which the underlying index must remain for the life of the transaction in order to receive the option payout. For most underlying indices, the index is measured once a day at a fixed time say If the index as measured on any day is outside the defined range, the payout is zero, i. Other products that allow investors to take advantage of range related views are Range Floaters. They can purchase a 6 month, 1.
The premium cost is say USD 60, The premium is usually expressed as the number of basis points paid in order to receive a bp payout, so in this example, the premium is 60bp. If this was the case, once one barrier had been breached the other would still be "alive". It is the addition of two "contingent" Knockout Options, i.
Should one barrier be breached, the other barrier option also dies. The payoff of a simple European or American style call or put option depends only on the value of the asset, not on the path taken to get there. A double barrier option has a lower barrier and an upper barrier. These barriers control the option. Once either of these barriers is breached, the status of the option is immediately determined: Double barrier options of many types exist and it is best to try to understand these options by considering several key features.
The first feature is the underlying option which can be a:. Other possibilities exist, for example an Asian option , but we will not consider these in this document nor are the functions relevant for any other cases.
With all of these various barrier functions, the specification of rebates is possible. These rebates cash or asset amounts can be specified if one or the other barrier is hit or if neither barrier is hit. The final feature is the type of monitoring that is done at the barriers. We also note the following convention: In the case of a standard DKO option for which the underlying price is less than the lower barrier value, or greater than the upper barrier value, all statistics are thus equal to zero, except the probability of breaching the barrier, which is equal to one.
The first feature is the underlying option which can be a: European style, call or put option American style, call or put option Binary option , cash or nothing, asset or nothing depending on whether barrier is hit or not hit Other possibilities exist, for example an Asian option , but we will not consider these in this document nor are the functions relevant for any other cases. The second feature is the combination of barriers. The options can be: In this case, both the lower and upper barrier are knock-out barriers.
Initially the holder of the option owns a call or a put option. If at any time, either barrier is breached, the option is lost knocked-out.
In some cases, at knock-out, the holder may receive a rebate. A double knock-in DKI , or one touch knock-in, Barrier Option In this case, if either barrier is breached, the holder of the barrier option is knocked-in to, i. In cases where the option is never knocked-in, the holder may receive a rebate.