Questions / Quant trading, Options & hedging
A barrier depends on the whole monitored path
A hypothetical European up-and-out call pays max(S_T−90,0) unless the stock touches or exceeds 110 at any time before or at expiry, in which case it pays zero. There is no rebate. The stock reaches 112 intraday and finishes at 100. What is the payoff?
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Answer: 0 price units
- The path crossed the continuously monitored barrier of 110. The option was knocked out, so the terminal intrinsic value of 10 is irrelevant and payoff is zero.
Interview shortcut. Knock-out: once 110 is touched the option is dead, whatever the close.
In the app this has a follow-up where one thing about the setup changes. Try the follow-up.