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FINANCIAL MARKET COURSES

Options - Barrier Options

Market participants are aware of the benefits of using options in their hedging and investing activities, but, when buying options, they are resistant to shelling-out cash on an instrument that may ultimately have no value. Barrier options can help in this regard.

 

The most common forms of barrier option are simple ‘knock-in’ or knock-out’ structures where an option either comes into existence (or else is extinguished) if the price of some reference asset moves above or below a ‘barrier’ level. Since the existence of the barrier always reduces the possibility of exercise, the barrier option will be cheaper than a vanilla call or put. However, the pricing and trading of these instruments can be far from straightforward. This course describes the different forms of barrier option, how they are used, and how they are priced and managed.

  • OBJECTIVES

    On completion of this course, you will be able to:

    Describe the key features and types of barrier option

    Explain why barrier options are useful

    Outline the pricing mechanisms for barrier options

    Describe how and when the sensitivities of these instruments differ from 'vanilla' alternatives

  • COURSE OUTLINE

    Topic 1: Introduction to Barrier Options

    Knock-Ins and Knock-Outs

    Types of Barrier Options

    Regular & Reverse Barrier

    Variations of Barrier Options

    Topic 2: Using Barrier Options

    Disagreeing with Impact Forces

    A More Favourable Market

    Using Support/Resistance Levels

    Using a Rainbow Barrier

    Topic 3: Risks of Barrier Options

    Risk Measurements

    o Delta

    o Gamma

    o Vega

    Second-Order Sensitivities

    Hedging Barrier Options

    Static Replication

    Topic 4: Pricing Barrier Options

    Barrier In-Out Parity

    Simple Analytic Solutions

    Numerical Approach

    o Lattice Method

    o Monte Carlo Simulation

  • PREREQUISITE KNOWLEDGE

  • ESTIMATED COMPLETED TIME

    90 Minutes

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