Posted on 14 August 2009
Tags: "In" Options, "Out" Options, Barrier options, currency trading, Down-and-in, Down-and-out, European call option, foreign exchange, foreign exchange markets, forex, Forex trading, FX, FX market, In-Out Parity, knock-in barrier price, knock-out barrier price, Main types of Barrier Options, null and void barriers, path-dependent exotics, predetermined level, premium, put-call parity, rebate, spot price, Types of Barrier Options, Up-and-in, Up-and-out, vanilla European call, vanilla option
Barrier options are path-dependent exotics that are identical in some ways to ordinary options. There are put and call, as well as there are some European and American varieties. But if the underlier reaches a predetermined level (barrier) then they become activated or, on the contrary, null and void.
“In” Options
“In” options lives are started as worthless and they only become active in the event a predetermined knock-in barrier price is breached.
“Out” Options
“Out” options lives are started as active and they become null and void in the event a certain knock-out barrier price is breached.
In any of the above two cases, if the option expires when it is inactive, then there might be a cash rebate paid out. In case if the option ends up worthless then this could be nothing, or it could be some fraction of the premium.
Main types of Barrier Options
Following are the four main types of barrier options:
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Up-and-out: In this type of barrier option, spot price starts below the barrier level and it has to move up for the option to be knocked out.
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Down-and-out: In this type of barrier option, spot price starts above the barrier level and it has to move down for the option to become null and void.
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Posted on 10 August 2009
Tags: American call option, call option, Call option Purchases, call writer, commodities, currency trading, European call option, financial asset, financial contract, financial instrument, foreign exchange, foreign exchange market, forex, Forex Market, FX market, Incentive stock options, interest rates, open market, Option Price, physical asset, premium, shares of stock, Strike price, the buyer, the expiration date, the seller, the underlying instrument, tradable call option, treasury stock, underlying's spot price, warrant, writer
A financial contract between two parties i.e. the buyer and the seller of this type of option, is referred to as a call option. It is the option to buy shares of stock at a specified time in the future. Usually it is simply labeled a “call”. In call option, the buyer of the option has the right, but it is not the obligation to buy an agreed quantity of a particular commodity or financial instrument (the underlying instrument) from the seller of the option at a certain time (the expiration date) for a certain price (the strike price). The seller (or “writer”) is obligated to sell the same commodity or financial instrument that is so decided by the buyer. For this right the buyer pays a fee that is referred to as a premium.
Buyer and Seller Anticipation
It is the will of the buyer of a call option that the price of the underlying instrument may rise in the future; the seller either anticipates that it will not rise, or he might be willing to give up some of the upside (profit) from a price rise in return for the premium (paid immediately) and retaining the opportunity to make a gain up to the strike price.
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