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FX Derivatives Trader School by Giles Jewitt

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Chapter 26Window Barrier and Discrete Barrier Options

Window barrier options are extensions of American barrier options. The difference being that window barriers are active only for a subsection of the life of the option. The two main window barrier variations are front-window barriers (barriers active from the horizon until a specified date prior to expiry) and rear-window barriers (barriers active from a specified date after the horizon until expiry).

Front-Window Barrier Options

Front-window barrier options, also called early ending barriers, have a vanilla payoff at expiry plus single (one) or double (two) American barriers that are active from the horizon but cease to be active on the barrier end date. The barrier end date occurs prior to the expiry date and the window barriers are either all knock-out or all knock-in. Exhibit 26.1 shows a typical front-window double knock-out barrier contract.

c26ex001

Exhibit 26.1 Front-window double knock-out barrier structure

Within a front-window knock-out barrier option:

  • If spot trades at or beyond (touches) a barrier prior to the barrier end date, the whole contract expires.
  • If spot does not touch a knock-out barrier prior to the barrier end date, at expiry there is a vanilla payoff.

Example: GBP/USD 1yr 1.6000 GBP call/USD put with front-window knock-out barriers for the first month at 1.5500 and 1.6000. With GBP/USD spot at 1.5865, ...

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