FX OPTIONS
Figure 4. Reverse-knock-in call option. The green (blue) payoff line is if the barrier is (not) touched during the life of the option.
p a y s o ut i f the pr i c e o f the und e r l y ing d o e s no t t o u ch the b a r r i e r b e f o r e e xp i r y ( s e e Fi g ur e 6 ) . The d o u b l e - no - t o u ch op t i on p a y s o ut i f the pr i c e o f the und e r l y ing s t a y s wi th in a r ang e no t t o u ch ing e i the r the l owe r o r the upp e r b a r r i e r o f th i s r ang e b e f o r e e xp i r y ( s e e
Fi g ur e 7 ) . Qu o t a t i on o f t o u ch op t i ons i s d one a s a p e r c ent a g e o f the p o s s i b l e p a y out amo unt , wh i ch c an b e s e en a s the (d i s c o unt e d ) pro b a b i l i t y o f the p a y o ut happ ening . Lo o king a t the qu o t a t i on a s the pro b a b i l i t y o f h i t t ing the b a r r i e r , we wi l l s e e f o r the one - t o u ch op t i on the e f f e c t o f the v a r y ing vo l a t i l i t y and b l a c k swans ,
Figure 7. Double-no-touch option. The green (blue) payoff line is if one (non) of the barriers are touched during the life of the option.
Figure 6. No-touch option entered with spot below the barrier. The green (blue) payoff line is if the barrier is (not) touched during the life of the option.
Figure 5. One-touch option entered with spot below the barrier. The green (blue) payoff line is if the barrier is (not) touched during the life of the option.
46 FX TRADER MAGAZINE July - September 2010
e xp l a ine d in the pr e v i o us a r t i c l e . S inc e we ha v e many sma l l mo v e s c omp a r e d t o a no rma l d i s t r i b ut i on, op t i ons c l o s e t o the b a r r i e r wi l l b e mo r e e xp ens i v e than i f the mo v e s whe r e no rma l l y
Li kewi s e i f
d i s t r i b ut e d . the r e a r e
mo r e e x t r eme mo v e s , one - t o u ch op t i ons wi th mo r e e x t r eme t o u ch l e v e l s wi l l
b e mo r e e xp ens i v e du e t o the inc r e a s e d l i ke l iho o d o f t o u ch ing . Fina l l y, one - t o u ch op t i ons in-b e twe en the two e x t r eme s wi l l a c tua l l y t r a d e a t a l owe r pr i c e than i f the pr i c e mo v e s o f the und e r l y ing we r e no rma l l y d i s t r i b ut e d . In th i s a r t i c l e we ha v e t o u che d up on the su b j e c t o f e xo t i c op t i ons , the r e e x i s t many o the r f o rms o f e xo t i c op t i ons su ch a s cho o s e r op t i ons , b a s ke t op t i ons , l o o kb a c k op t i ons , t o ment i on a f ew o f the i r c o l o r f u l name s . The s e wi l l b e l e f t a l one f o r now. The op t i ons e xp l a ine d in th i s a r t i c l e c o v e r the mo s t he a v i l y t r a d e d e xo t i c op t i ons wh i ch we c ons i d e r an int e r e s t ing s t a r t ing p o int f o r mo s t t r a d e r s .
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