Rebate Barrier Option
What Is a Rebate Barrier Option?
A rebate barrier option is a barrier option that includes a rebate provision. These types of options offer investors a rebate in view of a predetermined underlying asset price, which is known as a barrier price. The rebates associated with barrier options are given to investors when a barrier option can't be exercised.
Understanding Rebate Barrier Options
Rebate barrier options are an instance of standard barrier options that include a rebate provision to investors when the option is unable to be exercised. Barrier options can be offered in two over-simplifications and four unique forms, which are explained below. All forms of barrier options can contain a provision to give rebates, or payments, to holders on the off chance that the option doesn't arrive at the barrier price and becomes worthless when it terminates.
Such options are known as rebate barrier options. Rebates, in such cases, appear as a percentage of the premium paid by the holder for the option to the next counterparty.
Rebate barrier options can be complex and fall under the category of exotic options. Exotic options are known to have complex designs that build upon the essential concepts of plain vanilla options yet include non-standard terms.
Rebate Barrier Option Variations
Like all options, barrier options give the holder the right, however not the obligation, to buy or sell a financial asset at a settled upon price in light of their option position. Barrier option contracts are generally American options which permit the holder to exercise whenever up until the expiration. Where barrier options vary from standard options is in their barrier price, which can either make the option effective or defective.
Generally, there are two broad types of barrier options: knock-in or knock-out. Knock-in options can be either down-and-in or up-and-in. Knock-out options can be either down-and-out or up-and-out. Every one of these various types of options can include a rebate provision.
Knock-In Option
Knock-in options become effective when a predetermined barrier price is reached or surpassed, depending on the conditions. At the point when the barrier price is reached, the holder has the privilege to exercise up until the expiration. These options could offer a rebate to the holder on the off chance that the option is rarely enacted.
- Down and in: A down-and-in barrier option will become effective when a price reaches or falls below a barrier price.
- Up and in: A up-and-in barrier option will become effective when a price reaches or moves over a barrier price.
Knock-Out Option
Knock-out options are something contrary to knock-in and become defective when a barrier price is reached. At the point when the barrier price is reached, the option can never again be exercised. These barrier options might offer a rebate to the holder in the event that the option becomes defective.
- Down and out: In a down-and-out option, the option becomes defective when the price reaches or falls below the barrier.
- Up and out: In a up-and-out option, the option becomes defective when a price reaches or moves over the barrier.
Features
- Rebate provisions might be included in knock-in (down and in; up and in) or knock-out (down and out; up and out) options varieties.
- A rebate barrier option is a type of exotic option that includes a rebate provision paid to investors in the event that the barrier option can't be exercised.
- Rebates frequently appear as a percentage of the premium paid by the holder for the option.
