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Pat
Topic Author
Posts: 1200
Joined: September 30th, 2001, 2:08 am

### FX barrier options

Does anyone recall the standard way of pricing barrier options ? The way the street does it, as opposed theory

Cuchulainn
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Joined: July 16th, 2004, 7:38 am
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### Re: FX barrier options

my 2 cents

My guess is quants use numerical methods such as Crank Nicolson + workarounds a lot, at least for equities. It's fast and accurate (in the main). I reckon any method must be fast and accurate?

Maybe there is a better method. I don't know, myself.

Martinghoul
Posts: 3255
Joined: July 18th, 2006, 5:49 am

### Re: FX barrier options

I was under the impression that the bog standard methods that prevail in FX and have been covered by Wystup dominate.  I may be wrong abt that.

EdwinB
Posts: 8
Joined: February 12th, 2018, 10:58 pm

### Re: FX barrier options

A knock-In option is a type of barrier option that only comes into existence when the price of the underlying security reaches a specified barrier at any point in time during the option's life. Once a barrier is knocked in, or comes into existence, the option will not cease to exist until the option expires.

Knock-in options may be classified as up-and-in or down-and-in. In an up-and-in barrier option, the option only comes into existence if the price of the underlying asset rises above the pre-specified barrier, which is set above the initial asset price. Conversely, a down-and-in barrier option only comes into existence when the underlying asset price moves below a pre-determined barrier that is set below the initial asset price.

For example, assume an investor purchases a up-and-in call option with a strike price of $60 and a barrier of$65, when the underlying stock was trading at $55. Therefore, the option would not come into existence until the underlying stock price moved above$65.

Collector
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Joined: August 21st, 2001, 12:37 pm

### Re: FX barrier options

Soft or plain? Double or single? DEM or EURO?

travisf
Posts: 14
Joined: May 12th, 2015, 8:51 pm

### Re: FX barrier options

Does anyone recall the standard way of pricing barrier options ? The way the street does it, as opposed theory
Wow this sat for a long time without an on-point reply.  I would say the introductory paragraphs of Austing and Li's recent paper on model-independent barrier pricing accurately describe what the street does: everyone has their own in-house variation of a local/stochastic volatility model.  The details vary, but the final results are similar.  Austing & Li 2017 : " https://www.risk.net/media/download/949701/download