Hi,I'm reading the book "Exotic Options Trading" by F.Weert and just came across a question regarding the barrier shift of a down and in put. It says that for a 100/70 down and in put, one may choose to price and risk manage a 100/67 down and in put in such a way that the trader has enough room to sell excess shares when the price approaches the barrier. I don't quite get it, do we simply delta hedge the 100/67 option or do we need to sell the excess amount of shares when delta hedging the 100/67 option as the price approaches 70? Can sb explain this better for me please?Many thanks

QuoteOriginally posted by: cameronHi,I'm reading the book "Exotic Options Trading" by F.Weert and just came across a question regarding the barrier shift of a down and in put. It says that for a 100/70 down and in put, one may choose to price and risk manage a 100/67 down and in put in such a way that the trader has enough room to sell excess shares when the price approaches the barrier. I don't quite get it, do we simply delta hedge the 100/67 option or do we need to sell the excess amount of shares when delta hedging the 100/67 option as the price approaches 70? Can sb explain this better for me please?Many thanksFirst understand the pin risk at the barrier. Before the barrier if it's one day before expiry ur option value is almost 0, and just after the barrier is hit, the option value is large or positive. So for a small movement downwards your option price increases drastically, hence a huge delta. After the barrier is hit, it becomes a normal put so u need to get rid of this excess delta. model assumes u get rid of this excess at the barrier...which is impossible (in a discrete world)....hence u shift to barrier to allow room for selling. Pricing a 100/70 option as a 100/67 (in case u are buying from someone...coz generally dip's are attached to autocallables....hence sold by the investor...and bought by the issuer) thus reduces the price...and also gives u room for selling as price goes from 70 to 67...

QuoteOriginally posted by: animeshsaxenaQuoteOriginally posted by: cameronHi,I'm reading the book "Exotic Options Trading" by F.Weert and just came across a question regarding the barrier shift of a down and in put. It says that for a 100/70 down and in put, one may choose to price and risk manage a 100/67 down and in put in such a way that the trader has enough room to sell excess shares when the price approaches the barrier. I don't quite get it, do we simply delta hedge the 100/67 option or do we need to sell the excess amount of shares when delta hedging the 100/67 option as the price approaches 70? Can sb explain this better for me please?Many thanksFirst understand the pin risk at the barrier. Before the barrier if it's one day before expiry ur option value is almost 0, and just after the barrier is hit, the option value is large or positive. So for a small movement downwards your option price increases drastically, hence a huge delta. After the barrier is hit, it becomes a normal put so u need to get rid of this excess delta. model assumes u get rid of this excess at the barrier...which is impossible (in a discrete world)....hence u shift to barrier to allow room for selling. Pricing a 100/70 option as a 100/67 (in case u are buying from someone...coz generally dip's are attached to autocallables....hence sold by the investor...and bought by the issuer) thus reduces the price...and also gives u room for selling as price goes from 70 to 67...thanks for this. But what I'd like to know is that by applying a barrier shift, at what price are we supposed to sell the shares? If it's still below 70 while we ought to sell at 70, what difference does that make?