Equity Barrier Option

ORE defines the product as follows:

An Equity Barrier Option is a path-dependent option whose existence depends upon an Equity spot rate reaching a pre-set barrier level. Exercise is European.

Source: ORE User Guide, Products catalogue, eq_barrieroption.tex.

ORE states the monitoring as follows:

This product has a continuously monitored single barrier with a Vanilla European Equity Option Underlying. A set number of shares of a single name equity or an equity index is specified by the "Quantity".

Source: ORE User Guide, Products catalogue, eq_barrieroption.tex.

A barrier option is a vanilla option with a tripwire. The tripwire sits above or below the current price. If the price crosses it, the option either switches on or switches off. The tripwire makes the option cheaper or more exotic than the vanilla form.

The EquityBarrierOptionData node is the trade data container for the EquityBarrierOption trade type. It has one OptionData sub-node and one BarrierData sub-node. Only the European option style is allowed. The barrier level in BarrierData is quoted in the same currency as the underlying equity spot price. Changing the option from call to put does not require switching the barrier level. StartDate is optional. It starts the check for a barrier breach before today's date. Without it no check is made and no past breach is assumed. Calendar and EQIndex support that past check. The equity index format is EQ-RIC:Code. StrikeData holds the strike and supports StrikePrice only. Composite options with a strike currency different from the underlying equity currency are not supported. Quantity is the number of units of the underlying. Currency is the payment currency. Quanto payoffs are not allowed: the payment currency must equal the underlying equity currency up to the major or minor distinction.

The four main types are up-and-out, down-and-out, up-and-in and down-and-in. An up option starts below the barrier and needs the price to rise. A down option starts above the barrier and needs the price to fall. A knock-out option dies when the barrier is reached. A knock-in option becomes a vanilla equity option when the barrier is reached. An option that expires inactive pays zero, or a cash rebate paid as a fraction of the original premium. The value of the product is the vanilla option value adjusted for the probability of the barrier event.

• The spot price of the underlying equity and its distance to the barrier.
• The implied volatility of the underlying. It drives the chance of a breach.
• The strike and the barrier level.
• The interest rates and dividends of the underlying.
• The rebate, when one applies.

Close to the barrier the option is most sensitive to the spot and to volatility. The barrier probability dominates near the level.

The barrier is monitored continuously from the start date. A knock-in option that triggers becomes a vanilla equity option for the rest of its life. A knock-out option that triggers ends at once. If no breach occurs, an out option ages like a vanilla option until expiry, while its survival probability falls as time passes without a touch.

A barrier structure lets a customer pay for the optionality they expect to use. A knock-out call suits a view that the index stays below the barrier. The rebate softens the loss when the option dies. In ORE Studio a customer books equity barrier options to value them and run sensitivities on the ORE engine.

ORE's catalogue shows a call on the S&P 500 index with a strike of 3200 and a start date in 2025:

<EquityBarrierOptionData>
    <OptionData>
        ...
    </OptionData>
    <BarrierData>
        ...
    </BarrierData>
    <StartDate>2025-01-25</StartDate>
    <Calendar>TARGET</Calendar>
    <EQIndex>EQ-RIC:.SPX</EQIndex>
    <Name>RIC:.SPX</Name>
    <StrikeData>
      <StrikePrice>
        <Value>3200.00</Value>
        <Currency>USD</Currency>
      </StrikePrice>
    </StrikeData>
    <Quantity>1000</Quantity>
    <Currency>USD</Currency>
</EquityBarrierOptionData>

Source: ORE User Guide, Products catalogue, eq_barrieroption.tex, listing Equity Barrier Option data.