Exotic Options – Double Barrier Options

File Name: Exotic Options – Double Barrier Options

Location: Modeling Toolkit | Exotic Options | Double Barriers

Brief Description: Values various double barrier options, including up and in, up and out, with down and in, and down and out combinations, where a call or put option is knocked in or out of the money depending if it breaches an upper or lower barrier

Requirements: Modeling Toolkit

Modeling Toolkit Functions Used: MTBarrierDoubleUpOutDownOutCall, MTBarrierDoubleUpOutDownOutPut, MTBarrierDoubleUpInDownInCall, MTBarrierDoubleUpInDownInPut

Barrier options become valuable or get knocked in the money only if a barrier (upper or lower barrier) is breached (or not), and the payout is in the form of the option on the underlying asset. Double barrier options have two barriers, one above the current asset value (upper barrier) and one below it (lower barrier). Either barrier has to be breached for a knock-in or knock-out event to occur. In general, barrier options limit the potential of a regular option’s profits and hence cost less than regular options without barriers. Figure 45.1 gives an example of valuing double barrier options.

Figure 45.1: Computing double barrier options

As an example, in the Up and Out, Down and Out Call Option, the instrument is knocked out if the asset breaches either the upper or lower barriers, but remains in effect and the option is live at the end of maturity if the asset prices remain between these two barriers. Monitoring Periodicities means how often during the life of the option the asset or stock value will be monitored to see if it breaches a barrier. For example, entering 12 implies monthly monitoring, 52 means weekly monitoring, 252 indicates monitoring for daily trading, 365 means monitoring daily, and 1,000,000 is used for continuous monitoring. The delta curvature can also be entered for the upper and lower barrier asset prices if using barrier options as a delta or gamma hedge; otherwise, set these as zero.


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