The purpose of this article is to help clarify double barrier binary options values and exotic options. One-touch double barrier binary options are path-dependent options in which the existence and payment of the options depend on the movement of the underlying price through their option life.
We discuss two types of one-touch double barrier binary options here: For the first type, the option vanishes if the underlying price hits the upper barrier or the lower barrier once in the option life. Otherwise, the option buyer receives a fixed payment at maturity. This option combines the characteristics of a European binary option and knock-out barrier options together. For the second type, the option vanishes if the underlying price hits a knock-out barrier, while it gives a fixed payment if another payment barrier is touched.
This option can be considered as an American binary option with a knock-out barrier Hui, , p Exotic options are those options that are more complex in the way they are traded; these options are not very common types of options in the stock market. The option enables the trader to choose the trade method, for instance an investor can trade them in put or call options Kuznetsov, , p Exotic options owe their existence largely to the limitations and shortcoming of plain vanilla options.
Exotics allow particular types of investors to achieve investment goals unattainable with plain vanilla option strategies. Investors can generally be classified as either speculators or hedgers. Speculators want to gear up their capital, namely to seek investment opportunities with higher leverage than plain vanilla options.
This can be achieved through barrier or partial barrier plain vanilla options Bermin, , p Commoditized products have standard agreements in place, eliminate most surprises, and typically trade between dealers where constant matching of risks takes place. The existence of an interbank market is the test of standardization. They rank from the very simple cash products to some lower forms of exotic options.
Nonstandardized products, like structures, have payoffs that are peculiar to the instrument itself and require special pricing capabilities, such as an on-staff mathematician. In contrast, the commoditized products can be priced and managed with the aid of commercially available software products generally faulty. Barrier options are a widely used class of path-dependent derivative securities. Ku, , p Price is monitored with respect to a single constant barrier for the entire life of the option.
Due to their popularity in a market, more complicated structures of barrier options have been studied by a number of authors. Kunitomo and Ikeda  derived a pricing formula for double barrier options with curved boundaries as the sum of an infinite series. Geman and Yor  followed a probabilistic approach to derive the Laplace transform of the double barrier option price. For theses options, either the barrier disappears at a specified date strictly before the maturity i.
In the paper, the authors gave valuation formulas for partial barrier options in terms of bivariate normal distribution functions. Since the payment of the one-touch double barrier binary option is binary, they are not ideal hedging instruments. However, they are suitable for investment. Recently structured accrual range notes are popular in financial market.
The role of double barrier binary options is undervalued in the measurement of instruments and investments. It is significant that traders in binary examine exotic options and the role double barrier options plays in the consideration of investments.
This is important in the discussion of returns and which option opportunities yield the best results. While double barrier options can provide more opportunity because they they are not as simple as plain binary options they come with an exceeded level of risk.
Two Exotic Lookback Options. Applied Mathematical Finance, One-touch double barrier binary option values. Applied Financial Economics, Cross a barrier to reach barrier options. Journal of Mathematical Analysis and Applications, Double Barrier And Exotic Options 1. Introduction The purpose of this article is to help clarify double barrier binary options values and exotic options. Exotic Options Exotic options are those options that are more complex in the way they are traded; these options are not very common types of options in the stock market.
Here we see the connection between commoditized products, exotic options and barrier options. Conclusions The role of double barrier binary options is undervalued in the measurement of instruments and investments. Managing vanilla and exotic options. Join my newsletter and get free tools, strategies and case studies, I break down my success in binary and help my readers achieve their goals.
I've only sent one email so far this year. Binary Today would like to remind you that the content contained in this website is not necessarily real-time nor accurate.
Past performance does not guarantee future performance, the above is not indicative and is purely for educational purposes only. Relying on the above for investment, trading or betting in binary options or Forex is not advised unless done so with virtual money only.
Binary Today or anyone involved with Binary Today will not accept any liability for loss or damage as a result of reliance on the information including reviews, recommendations, charts, software, income reports and signals contained within this website.
Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.More...