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Key Financial Market Concepts, 2nd Edition by Bob Steiner

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Barrier Options: Knock-out Option and Knock-in Option

Definition

A barrier option is a class of options, including knock-out and knock-in options, which are either cancelled or activated if the underlying price reaches a predetermined barrier or trigger level.

A knock-out option is an option which is cancelled if the trigger level (the outstrike) is reached.

A knock-in option is an option which is activated if the trigger level (the instrike) is reached.

How are they used?

Barrier options are usually straightforward European options until, or from, the time the underlying reaches the trigger level. With a knock-out option, the option exists in the usual way – and either it is exercised at expiry or it expires worthless, depending on the underlying ...

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