: What is the purpose of a strike price in a barrier option? Is there any real purpose to it? A barrier option is only triggered by reaching the barrier price anyways.

Vote Up Vote Down   0 Reactions

Login to give Reaction!

In a barrier option, the strike price serves the same purpose as for regular options. Barrier options have one difference from regular options: a barrier price which "activates" or "disactivates" the option.

For a "knock-in" barrier option, the option does not "exist" before the barrier price is reached. The option will only be "activated" when the barrier price is reached.

For a "knock-out" barrier option, the option becomes null and void when the barrier price is reached. The option will be permanently "deactivated" and worthless when the barrier price is reached.

As you can see, the strike price is still relevant. It's only the addition of a barrier price that makes an option a barrier option.

Is there any real purpose to [a strike price]? A barrier option is only triggered by reaching the barrier price anyways.

For a "knock-in" barrier option you will still need the strike price once the barrier price is reached. For a "knock-out" barrier option, you will still need the strike price if the barrier price is never reached.