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FX Derivatives Trader School by Giles Jewitt

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Chapter 23Touch Options

If FX derivative contracts contain a barrier that is monitored continuously against spot, the barrier is described as American or continuous. The simplest American barrier products are touch options. There are two main kinds of touch option: One-touch options pay out a fixed amount of cash on the delivery date if spot trades through a specified barrier level at any time between horizon and expiry. No-touch options pay out a fixed amount of cash on the delivery date if spot does not trade through a specified barrier level.

Touch options are the American barrier version of European digitals and there are many similarities. Prices on touch options are quoted as a percentage of the payout notional, and like European digitals, prices cannot be quoted in the non-payout currency because there is no strike to switch between notional currencies.

The Greek exposures on touch options can be thought of as being “caused by” the American barrier, just as Greek exposures on vanilla options are “caused by” the strike.

The theoretical value (TV) of a one-touch usually lies between 0% and 100%, as shown in Exhibit 23.1. Note that one-touch TV doesn't always lie between 0% and 100% because interest rates could be negative.

c23ex001

Exhibit 23.1 100.00 one-touch TV over time

It is important to understand that prior to expiry, in a delta hedged trading position, there is no large ...

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